Retirement Security Rule: Definition of an Investment Advice Fiduciary, 32122-32258 [2024-08065]

Download as PDF 32122 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 lotter on DSK11XQN23PROD with RULES4 SUMMARY: VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 32123 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32124 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). 12 26 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 19 Regulation VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32126 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 32127 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. E:\FR\FM\25APR4.SGM 25APR4 32128 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). lotter on DSK11XQN23PROD with RULES4 76 Id. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 32129 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. E:\FR\FM\25APR4.SGM 25APR4 32130 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 32131 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). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32132 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations • 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 113 Id. Jkt 262001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 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.’’) E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 32133 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. E:\FR\FM\25APR4.SGM 25APR4 32134 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32136 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 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 . . . .’’ E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 32137 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- E:\FR\FM\25APR4.SGM Continued 25APR4 32138 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 32140 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 159 One VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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’’). PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 32142 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32144 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32146 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM Continued 25APR4 32148 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations Recommendations on the Selection of Other Persons To Provide Investment Advice or Investment Management lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 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.’’). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 32150 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 at 75978. Frm 00030 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM Continued 25APR4 32152 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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)). PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32154 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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, VerDate Sep<11>2014 885 F.3d 360, 369 (5th Cir. 2018). 20:41 Apr 24, 2024 Jkt 262001 (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 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32156 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). lotter on DSK11XQN23PROD with RULES4 204 SEC VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 32157 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 E:\FR\FM\25APR4.SGM 25APR4 32158 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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.’’) PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 32159 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 E:\FR\FM\25APR4.SGM 25APR4 32160 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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’’ VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32162 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 228 Proposed Retirement Security Rule 88 FR 75890, 75907–8 (Nov. 3, 2023). 229 Id. at 75907. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 32163 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32164 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 32165 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32166 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 (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). PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations rule strikes the correct balance and not to adopt changes that would single-out PEPs and PPPs. lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 32167 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). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32168 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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) PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). lotter on DSK11XQN23PROD with RULES4 241 15 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 32169 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 E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32170 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 32171 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 E:\FR\FM\25APR4.SGM 25APR4 32172 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 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 . . . .’’). E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 32173 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. E:\FR\FM\25APR4.SGM 25APR4 32174 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 32175 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). E:\FR\FM\25APR4.SGM 25APR4 32176 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 32177 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 E:\FR\FM\25APR4.SGM Continued 25APR4 lotter on DSK11XQN23PROD with RULES4 32178 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 32179 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). E:\FR\FM\25APR4.SGM 25APR4 32180 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 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/ E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32182 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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: lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32184 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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/. PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM Continued 25APR4 32186 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32188 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. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). lotter on DSK11XQN23PROD with RULES4 412 Aron VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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).’’ PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32190 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 .................. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 .................. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32192 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM at section 5.I. at section 5.B. and J. 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32194 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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/. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32195 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 32196 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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). lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 ............................ 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. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 ......................... lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 32198 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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, VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 32200 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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% PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM Continued 25APR4 lotter on DSK11XQN23PROD with RULES4 32202 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 32204 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 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, E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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.) VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 Frm 00085 Fmt 4701 Sfmt 4700 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/. E:\FR\FM\25APR4.SGM 25APR4 32206 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 32207 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. E:\FR\FM\25APR4.SGM 25APR4 32208 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 32209 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. E:\FR\FM\25APR4.SGM 25APR4 32210 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32212 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 32213 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). E:\FR\FM\25APR4.SGM 25APR4 32214 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 One regulator noted, ‘‘With billions of dollars in sales to be made, insurance companies may offer commissions as high as 10 percent to agents to sell products like long-term deferred annuities to senior citizens.’’ 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. PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 32215 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. E:\FR\FM\25APR4.SGM 25APR4 32216 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 32217 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 32218 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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’’). PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 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). E:\FR\FM\25APR4.SGM 25APR4 32220 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 32221 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). E:\FR\FM\25APR4.SGM 25APR4 32222 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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/ VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32223 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 E:\FR\FM\25APR4.SGM 25APR4 32224 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32226 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: lotter on DSK11XQN23PROD with RULES4 (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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 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- E:\FR\FM\25APR4.SGM 25APR4 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. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32228 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 715 This VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 Frm 00109 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32230 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 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. E:\FR\FM\25APR4.SGM 25APR4 32232 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM Continued 25APR4 32234 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00114 Fmt 4701 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 32235 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. E:\FR\FM\25APR4.SGM 25APR4 32236 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. 20:41 Apr 24, 2024 Jkt 262001 Costs Associated With Amendment to PTE 86–128 Summary of Affected Entities Summary of Total Cost for the Amendments to PTE 75–1 VerDate Sep<11>2014 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. PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 81 FR 21002 (Apr. 8, 2016). 25APR4 32238 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 32239 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 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 32240 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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). PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. E:\FR\FM\25APR4.SGM 25APR4 32242 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 Frm 00122 Fmt 4701 Sfmt 4700 E:\FR\FM\25APR4.SGM 25APR4 32243 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 $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. VerDate Sep<11>2014 $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 PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 E:\FR\FM\25APR4.SGM 25APR4 32244 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 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.) PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 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. PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM Continued 25APR4 32246 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 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 E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 Insurer (%) VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 E:\FR\FM\25APR4.SGM 25APR4 32248 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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 lotter on DSK11XQN23PROD with RULES4 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 VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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. PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 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. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations 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. lotter on DSK11XQN23PROD with RULES4 835 This VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 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 PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 32249 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 may not equal the sum of the parts due to rounding. 841 The burden is estimated as: 5,479 newly reliant small entities × 2 hours) ≈ 25,377 hours. A labor rate of $198.25 is used for a financial manager. The labor rate is applied in the following calculation: 10,958 burden hours × $198.25 ≈ $2,172,432. Note, the total values may not equal the sum of the parts due to rounding. 842 The burden in the first year is estimated as: $60,215,805 for rule review + $4,398,045 for disclosures + $39,121,801 for rollover documentation + $20,008,658 for policies and procedures + $8,171,727 for retrospective review = $131,918,693. The burden in the subsequent years is estimated as: $574,609 for disclosures + $39,121,801 for rollover documentation + $15,053,951 for policies and procedures + $8,171,727 for retrospective review = $62,922,896. E:\FR\FM\25APR4.SGM 25APR4 32250 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations TABLE 13—THREE-YEAR AVERAGE COST BY TYPE OF ENTITY AND REQUIREMENT Broker-dealer Total ............................................... Per-Entity ....................................... Disclosure: Total ........................................ Per-Entity ................................ Rollover Documentation: Total ........................................ Per-Entity ................................ Policies: Total ........................................ Per-Entity ................................ Retrospective Review: Total ........................................ Per-Entity ................................ Total: Total ........................................ Per-Entity ................................ SBA: SBA Threshold ........................ Per-Entity Cost as a Percentage of SBA Threshold. SEC-registered investment adviser State-registered investment adviser Insurance company Robo-adviser Non-bank trustee $2,057,340 $1,105 $8,766,344 $1,105 $9,124,980 $1,105 $77,978 $1,105 $11,047 $1,105 $34,247 $1,105 $101,864 $55 $846,560 $107 $881,193 $107 $6,509 $92 $8,143 $814 $4,820 $155 $878,139 $472 $18,493,989 $2,331 $19,250,589 $2,331 $2,048 $29 $460,359 $46,036 $36,678 $1,183 $1,789,886 $961 $7,232,234 $911 $7,528,108 $911 $76,028 $1,077 $19,333 $1,933 $59,932 $1,933 $350,946 $188 $1,351,008 $170 $1,406,278 $170 $13,309 $189 $4,661 $466 $14,449 $466 $5,178,174 $2,781 $36,690,135 $4,624 $38,191,149 $4,624 $175,871 $2,492 $503,542 $50,354 $150,125 $4,843 $47,000,000 $47,000,000 $47,000,000 $47,000,000 $47,000,000 $47,000,000 0.006% 0.010% 0.010% 0.005% 0.107% 0.010% In response to comments, the Department has also conducted an analysis of these per-entity costs as a share of a variety of different entity sizes. This analysis for PTE 2020–02 is presented below in Table 14. TABLE 14—THREE-YEAR AVERAGE PER-ENTITY COST OF PTE 2020–02 BY ENTITY AND REVENUE, SHARE OF REVENUE 843 Revenue Insurance company (%) <$100k ..................................................... $100–$500k ............................................. $0.5–$1m ................................................. $1–$5m .................................................... $5–$25m .................................................. $25–$47m ................................................ SBA Small ................................................ ........................ ........................ ........................ ........................ ........................ ........................ 0.01 Cost Associated With PTE 84–24 Summary of Affected Entities As discussed in the Affected Entities section of the regulatory impact analysis, the Department expects that 86,769 small financial entities will be affected by the amendments, including 924 pension consultants, 20 investment company principal underwriters, 85,564 Independent Producers, and 261 insurance companies.844 lotter on DSK11XQN23PROD with RULES4 Cost To Review the Rule The Department estimates that all 86,769 of the small Financial 843 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. 844 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 Broker-dealers (%) SECregistered RIA (%) 4.66 0.81 0.35 0.10 0.04 0.04 0.01 4.91 1.04 0.61 0.29 0.22 0.17 0.01 Institutions affected will each need to review the rule and develop an implementation plan, as it applies to their business. The Department estimates that such a review and planning will take a legal professional, on average, 20 hours for small insurers, pension consultants, and mutual fund underwriters. The Department expects that the majority of Independent Producers will receive support from the carrier(s) they are contracted with or the Insurance Marketing Organization in understanding the rulemaking and therefore 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 PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 Stateregistered RIA (%) 4.91 1.04 0.61 0.29 0.22 0.17 0.01 Robo-advisers (%) Nonbank trustees (%) ........................ ........................ ........................ ........................ ........................ ........................ 0.11 7.34 1.23 0.50 0.14 0.05 0.05 0.01 practices, resulting in a total cost of $74.7 million in the first year.845 Costs Associated With General Disclosures The amendment requires small Independent Producers to provide disclosures to Retirement Investors prior to, or at the time of, a transaction covered by this exemption. For more information on the requirement changes for each disclosure, refer to the descriptions in the preamble and regulatory impact analysis of this 845 The burden is estimated as: [(85,564 Independent Producers × 5 hours) + (1,205 entities × 20 hours) ≈ 450,835 hours. A labor rate of $165.71 is used for a legal professional and a labor rate of $165.29 for an Independent Producer. The labor rate is applied in the following calculation: [(85,564 Independent Producers × 5 hours × $165.29) + (1,205 entities × 20 hours × $165.71)] ≈ $74,707,970. Note: Due to rounding values may not sum. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations document. The Department estimates the marginal cost of the disclosure requirements to be approximately $43.6 million in the first year for the development of disclosures to meet the requirements of the rulemaking.846 Cost Associated With Rollover Documentation and Disclosure lotter on DSK11XQN23PROD with RULES4 The amendment requires an Independent Producer to provide a rollover disclosure that is similar to the disclosure required in the amended PTE 2020–02. As discussed in the regulatory impact analysis, the Department assumes that such disclosures will be prepared by the Independent Producer. In the regulatory impact analysis, the Department estimates that 500,000 Retirement Investors will receive documentation of the basis for recommending a rollover each year.847 The Department does not have data on what proportion of rollovers will be produced by small Independent Producers. For the purposes of this analysis, the Department assumes that the proportion of rollovers advised by small Independent Producers is equal to the share of revenue associated with small Independent Producers compared 846 The burden is estimated as: Fiduciary Notice = For Independent Producers: [(86,410 Independent Producers × 99% proportion of entities are small Independent Producers × 5% assumed to create disclosure) × (30 minutes ÷ 60 minutes)] ≈ 2,139 hours. Applying a labor rate for an Independent Producer results in: (2,139 hours × $165.29) ≈ $353,571. For insurers: 358 insurers × 73.1% proportion of entities that are small × (30 minutes ÷ 60 minutes) ≈ 131 hours. Applying a labor rate for a legal professional results in: (131 hours × $165.71) ≈ $21,652. Combining the costs for both entity types yields: $353,571 + $21,052 ≈ 375,223 to create the fiduciary notice. Written Statement of Care Obligation & Loyalty Obligation = For Independent Producers: [(86,410 Independent Producers × 99% proportion of entities are small Independent Producers × 5% create disclosure) × 1 hour] ≈ 4,278 hours. Applying a labor rate for an Independent Producer results in: (4,278 hours × $165.29) ≈ $707,142. For insurers: 358 insurers × 73.1% proportion of entities that are small × 1 hour ≈ 261 hours. Applying a labor rate for a legal professional results in: (261 hours × $165.71) ≈ $43,303. Combining the costs for both entity types yields: $707,142 + $43,303 ≈ $750,445. Relationship and Conflict of Interest disclosure= [(86,410 Independent Producers × 99% proportion of entities are small Independent Producers) × 3 hours] ≈ 256,691 hours. Applying a labor rate for legal professional results in: (256,691 hours × $165.71) ≈ $42,536,316. Summing these components results in the total estimated cost of: ($353,571 for Fiduciary Notice by Independent producer + $21,652 for Fiduciary Notice by Insurer + $707,142 for Statement of Care Obligation & Loyalty Obligation by Independent Producer + $43,303 for Statement of Care Obligation & Loyalty Obligation by Insurer + $42,536,316 for Relationship and Conflict of Interest disclosures by Independent Producer) ≈ $43,661,983. 847 For information on this estimate, refer to the estimate of IRAs affected by the amendments to PTE 84–24 in the Affected Entities section of the regulatory impact analysis. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 to the revenue produced by all Independent Producers. The Department estimates that approximately 48.7 percent of rollovers will be produced by small Independent Producers.848 The Department estimates small Independent Producers will need to provide approximately 243,600 rollover disclosures annually. This results in an estimated cost of approximately $20.1 million annually.849 Costs Associated With the Provision of Disclosures to Retirement Investors The Department estimates that the number of disclosures that will need to be provided to Retirement Investors by small entities is equal to the number of rollover disclosures, or approximately 243,600 disclosures. Preparing and sending the general disclosures described above is estimated to cost of approximately $450,000.850 Additionally, as discussed in more detail in the Cost section of the regulatory impact analysis, the Retirement Investor may request a follow up disclosure which is intended to provide more detail on the compensation associated with the potential transaction. The Department estimates that 10 percent of Retirement Investors will request additional information regarding the rollover and will need to be provided this disclosure 848 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. 849 The burden is estimated as: [(500,000 rollovers × 48.7% proportion of business activity associated with small entities) × (30 minutes ÷ 60 minutes)] ≈ 121,824 burden hours. A labor rate of $165.29 is used for an Independent Producer. The labor rate is applied in the following calculation: [(500,000 rollovers × 48.7% proportion of business activity associated with small entities) × (30 minutes ÷ 60 minutes)] × $165.29 ≈ $20,136,349. For more information on the assumptions included in this calculation, refer to the regulatory impact analysis of this document. 850 The labor cost is estimated as: [(500,000 disclosures × 28.2% sent by mail × 48.7% proportion of business activity associated with small Independent Producers) × (2 minutes ÷ 60 minutes)] ≈ 2,290 burden hours. A labor rate of $165.29 is used for an insurance sales agent. The labor rate is applied in the following calculation: [(500,000 disclosures × 28.2% sent by mail × 48.7% proportion of business activity associated with small Independent Producers) × (2 minutes ÷ 60 minutes)] × $165.29 ≈ $378,563. The material cost is estimated as: 68,709 rollovers resulting in a paper disclosure × [$0.68 postage + ($0.05 per page × 7 pages)] ≈ $70,770. The total cost is estimated as: $378,563 + $70,770 ≈ $449,334. For more information on the assumptions included in this calculation, refer to the regulatory impact analysis of this document. PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 32251 which is estimated to cost approximately $714,000 to produce and provide.851 Additionally, Independent Producers will be required to send the documentation to the insurance company for pre-transaction approval. The Department expects that such documentation will be sent electronically and result in a de minimis burden. Costs Associated With the Retrospective Review The amendment requires a retrospective review to be conducted at least annually. The review must 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. Insurers will be required to annually provide a written report that details the review to a Senior Executive Officer for certification. Insurers will also be required to provide the Independent Producer with the underlying methodology and results of their retrospective review. 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 851 The labor cost is estimated as: (500,000 rollovers × 48.7% proportion of business activity associated with small entities × 10% request rate) ≈ 24,365 requests for the Detailed Compensation Disclosure. Each disclosure is estimated to take 10 minutes to prepare. Therefore, the hours burden is: 24,365 disclosure requests × (10 minutes ÷ 60 minutes) ≈ 4,061 burden hours. A labor rate of $165.29 is used for an insurance sales agent. The labor rate is applied in the following calculation: 4,061 burden hours × $165.29 ≈ $671,212. The mailing cost is estimated as: (24,365 requests × 28.2% receiving disclosures via mail) ≈ 6,871 rollovers resulting in a paper disclosure × [$0.68 postage + ($0.05 per page × 2 pages)] + (2 minutes ÷ 60 minutes) to prepare the disclosure for mailing × $165.29 labor rate for an Insurance Sales Agent ≈ $43,216. The total cost is estimated as: $671,212 + $43,216 ≈ $714,427. For more information on the assumptions included in this calculation, refer to the regulatory impact analysis of this document. E:\FR\FM\25APR4.SGM 25APR4 32252 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 of Independent Producers and has revised them upward accordingly. The Department estimates that Insurers will need to prepare a total of 259,230 retrospective reviews.852 The Department does not have data on the proportion of retrospective reviews that will be prepared by small insurance companies. As presented in the Summary of Affected Entities section of this RFA, the proportion of activity or cost associated with small entities for entity level tasks is attributed by the share of small entities in that industry. This results in an estimate of approximately 189,428 retrospective reviews for small insurance companies.853 The Department assumes that the audit preparation will take one hour of a legal professional’s time, at a labor cost of $165.71 per hour. Therefore, the cost to small insurers is estimated at approximately $31.4 million annually.854 The certification of the summary of the audits is expected to take a Senior Executive Officer, at a labor cost of $133.24 per hour, an average of four hours per small entity, which results in an estimated approximate cost of $139,273.855 Finally, the Department estimates that it will take a clerical professional, at a labor rate of $65.99 per hour, five minutes per report to provide the results and methodology to Independent Producers. This results in an estimated cost to small entities of roughly $1 million.856 These communications are assumed to be electronic therefore there are no postage or materials costs. The Department estimates that meeting the requirements of the rulemaking, which include conducting and drafting the retrospective review, having the review certified by a Senior Executive, and providing feedback to 852 For more information on this estimate, refer to the Cost section of the regulatory impact analysis. 853 The number of retrospective reviews prepared by small insurance companies is estimated as: [259,230 × (358 entities × 73.1% SBA small entities)] ≈ 189,428 retrospective reviews. 854 This burden is estimated as: (189,428 reviews by small entities × 1 hour) ≈ 189,428 hours. A labor rate of $165.71 is used for a legal professional. The labor rate is applied in the following calculation: (189,428 reviews by small entities × 1 hour) × $165.71 ≈ $31,390,045. 855 This burden is estimated as: (358 entities × 73.1% SBA small entities) × 4 hours ≈ 1,045 hours burden. A labor rate of $133.24 is used for a senior executive officer. The labor rate is applied in the following calculation: (358 entities × 73.1% SBA small entities × 4 hours) × $133.24 ≈ $139,273. 856 This burden is estimated as: 189,428 reviews by small entities × (5 minutes ÷ 60 minutes) ≈ 15,786 burden hours. A labor rate of $65.99 is used for a clerical worker. The labor rate is applied in the following calculation: [189,428 reviews by small entities × (5 minutes ÷ 60 minutes)] × $65.99≈ $1,041,694. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 Independent Producers to result in an annual cost of approximately $32.6 million.857 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 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 1 percent of transactions will result in self-correction. This results in 2,436 notifications of self-corrections being sent from small Independent Producers. 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 $201,363.858 Costs Associated With Policies and Procedures The amendment requires Insurers to establish, maintain, and enforce written policies and procedures for the review of each Independent Producer’s recommendation before an annuity is issued to a Retirement Investor. The 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 Insurer, 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 857 This burden is the combination of: $31,390,045 to conduct the review + $139,273 to review and certify the review + $1,041,694 to provide review results to Independent Producers ≈ $32,571,012. 858 The burden is estimated as: [(500,000 transactions × 1% of transactions resulting in selfcorrection × 48.7% proportion of business activity associated with small Independent Producers) × (30 minutes ÷ 60 minutes)] ≈ 1,218 hours. A labor rate of $165.29 is used for an Independent Producer. The labor rate is applied in the following calculation: [(500,000 transactions × 1% of transactions resulting in self-correction × 48.7% proportion of business activity associated with small Independent Producers) × (30 minutes÷ 60 minutes)] × $165.29 ≈ $201,363. PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 Producer to sell the Insurer’s annuity contracts to Retirement Investors, and for taking action to protect Retirement Investors from Independent Producers who have 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. The Department estimates that drafting or modifying the policies and procedures will cost approximately $0.9 million in the first year 859 and that the requirement to review policies and procedures annually will cost approximately $217,000 in subsequent years for small entities.860 The Department estimates that it will take the Insurer approximately 30 minutes to review the Independent Producers rollover recommendation and to provide feedback to the Independent Producer resulting in an annual cost of $159,000.861 Providing policies and procedures to the Department upon request is estimated to result in a de minimis annual cost.862 859 This is estimated as: (358 insurers × 73.1% proportion of small insurance companies × 20 hours) ≈ 5,226 hours. A labor rate of $165.71 is used for a legal professional. The labor rate is applied in the following calculation: (358 insurers × 73.1% proportion of small insurance companies × 20 hours) × $165.71 ≈ $866,069. For more information on the assumptions included in this calculation, refer to the regulatory impact analysis of this document. 860 This is estimated as: (358 insurers × 73.1% proportion of small insurance companies × 5 hours) = 1,307 hours. A labor rate of $165.71 is used for a legal professional. The labor rate is applied in the following calculation: (358 insurers × 73.1% proportion of small insurance companies × 5 hours) × $165.71 ≈ $216,517. For more information on the assumptions included in this calculation, refer to the regulatory impact analysis of this document. 861 This is estimated as: [(500,000 IRA rollover transactions × 0.3% proportion of business activity associated with small insurers) × (30 minutes ÷ 60 minutes)] ≈ 802 burden hours. A labor rate of $198.25 is used for a financial manager. The labor rate is applied in the following calculation: [(500,000 IRA rollover transactions × 0.3% proportion of business activity associated with small insurers) × (30 minutes ÷ 60 minutes)] × $198.25 ≈ $158,969. The communication of the outcome is expected to be provided electronically. 862 The number of requests in the first year is estimated as: [(358 insurers × 73.1% proportion of insurance companies that are small) ÷ 87,799 affected entities] × (165 requests in PTE 2020–02 ≈ 3 requests. The number of requests in subsequent years is estimated as: [(358 insurers × 73.1% proportion of small insurance companies) ÷ 87,799 affected entities] × 50 requests in PTE 2020–02 ≈ 1 request. 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 calculations: Year one: (3 requests × (15 minutes ÷ 60 minutes)) × $65.99 ≈ $49. Subsequent years: (1 request × (15 minutes ÷ 60 minutes)) × $65.99 ≈ = $17. E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations Costs Associated With the Recordkeeping The 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 investment advice. The Department estimates that the additional time needed to maintain records for the Financial Institutions to be consistent with the exemption will require an insurance company and Independent Producer two hours annually, resulting in an estimated annual cost of $28.4 million.863 32253 Summary of Total Cost The Department estimates that in order to meet the additional conditions of the amended PTE 84–24, small, affected entities would incur a total cost of $201.8 million in the first year and $82.8 million in subsequent years. The total and per-entity cost by type of entity is broken down in the table below. TABLE 15—COST BY TYPE OF SMALL ENTITY AND REQUIREMENT, FIRST YEAR Independent producer Rule Review: Total .......................................................................................................... Per-Entity .................................................................................................. Disclosure: Total .......................................................................................................... Per-Entity .................................................................................................. Policies and Procedures: Total .......................................................................................................... Per-Entity .................................................................................................. Retrospective Review: Total .......................................................................................................... Per-Entity .................................................................................................. Self-Correction: Total .......................................................................................................... Per-Entity .................................................................................................. Recordkeeping: Total .......................................................................................................... Per-Entity .................................................................................................. Total: Total Cost ................................................................................................. Per-Entity Cost ......................................................................................... SBA: Threshold (in $ millions) ........................................................................... Per-Entity Cost as a Percentage of SBA Threshold ................................ In response to comments, the Department has also conducted an Pension consultants Financial institutions/ insurance companies Mutual fund underwriters $70,714,175 826 $3,061,442 3,314 $866,069 3,314 $66,284 3,314 64,897,138 758 ........................ ........................ 65,955 249 ........................ ........................ ........................ ........................ ........................ ........................ 1,025,087 3,923 ........................ ........................ ........................ ........................ ........................ ........................ 32,571,012 124,640 ........................ ........................ 201,363 2 ........................ ........................ ........................ ........................ ........................ ........................ 28,285,670 331 ........................ ........................ 86,607 331 ........................ ........................ 164,098,348 1,918 3,061,442 3,314 34,613,730 132,457 66,284 3,314 15.0 0.013% 45.5 0.007% 47.0 0.282% 47.0 0.007% analysis of these per-entity costs as a share of a variety of different entity sizes. This analysis for PTE 84–24 is presented below in Table 16. TABLE 16—THREE-YEAR AVERAGE PER-ENTITY COST OF PTE 84–24 BY ENTITY AND REVENUE, SHARE OF REVENUE 864 Independent producer (%) Revenue lotter on DSK11XQN23PROD with RULES4 <$100k ............................................................................................................. $100–$500k ..................................................................................................... $0.5–$1m ......................................................................................................... $1–$5m ............................................................................................................ $5–$25m .......................................................................................................... $25–$47m ........................................................................................................ SBA Small ........................................................................................................ 863 This is estimated as: (85,564 Independent Producers + 301 small insurance companies) × 2 hours = 171,650 hours. A labor rate of $165.29 is used for an Independent Producer. A labor rate of $165.71 is used for a legal professional. The labor VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 3.16 0.53 0.21 0.05 0.01 0.00 0.01 rate is applied in the following calculation: [(85,564 Independent Producers × 2 hours × $165.29) + (301 small insurance companies × 2 hours × $165.71)] = $28,372,277. PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 Insurance company ........................ ........................ ........................ ........................ ........................ ........................ 0.28 Pension consultants (%) 6.63 1.10 0.44 0.11 0.02 0.01 0.01 Investment company principal underwriters ........................ ........................ ........................ ........................ ........................ ........................ 0.01 864 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. E:\FR\FM\25APR4.SGM 25APR4 32254 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations Costs Associated With the Mass Amendments Cost Associated With PTE 75–1 Summary of Affected Entities The amendment to PTE 75–1 will affect banks, reporting dealers, and broker-dealers registered under the Security Exchange Act of 1934. As discussed in the Affected Entities section above, the Department estimates that 3,944 Financial Institutions, comprised of 1,919 broker-dealers and 2,025 banks, would use PTE 75–1.865 The Department estimates that, of these affected entities, 1,861 broker-dealers and 1,538 banks would be small. Costs Associated With Disclosure Requirements in Part V The Department amended 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 certain conditions are met.866 Prior to the extension of credit, the plan or IRA must receive written a disclosure, including the interest rate or other fees that will be charged on the credit extension as well as the method of determining the balance upon which interest will be charged. As discussed in the regulatory impact analysis, the Department expects that these disclosures are common business practice and will not create an additional burden on small brokerdealers or banks. Costs Associated With Recordkeeping in Parts II and V Additionally, the Department proposed to amend PTE 75–1 Parts II and V to adjust the recordkeeping requirement to shift the burden from plans and IRAs to Financial Institutions. For the final amendments, this requirement was removed, so there is no added burden for recordkeeping. lotter on DSK11XQN23PROD with RULES4 Costs Associated With Removing Fiduciary Investment Advice From Parts III and IV Finally, the Department amended Parts III and IV, which currently provide 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 865 For more information on how the number of each type of entity is estimated, refer to the Affected Entities sections of the regulatory impact analysis and the Regulatory Flexibility Analysis. 866 For more information on these conditions, refer to the preamble and regulatory impact analysis of this document. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 PTE 2020–02 for exemptive relief covering investment advice transactions. The Department believes that since investment advice providers were already required to provide records and documentation under PTE 2020–02, this amendment will not result in additional costs. Summary of Total Cost The removal of investment advice from PTE 75–1 Parts III & IV moves the estimated costs of providing investment advice to the cost estimates for PTE 2020–02 and leaves other burdens unchanged. 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. In response to comments, the Department has conducted an analysis of the remaining per-entity costs as a share of a variety of different entity sizes. Cost Associated With PTE 77–4, PTE 80–83, PTE 83–1, and PTE 86–128 Summary of Affected Entities The amendment to PTE 77–4 will affect 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 77–4.867 PTE 80–83 allows banks to purchase, on behalf of employee benefit plans, securities issued by a corporation indebted to the bank that is a party in interest to the plan. The Department estimates that 19 small fiduciary-banks with public offering services will be affected by the amended PTE 80–83.868 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 amendment to PTE 86–128 will affect fiduciaries of employee benefit plans that affect or execute securities transactions (‘‘transacting fiduciaries’’) and independent plan fiduciaries that authorize the plan. As discussed in the Affected Entities section, the Department estimates that 243 transacting fiduciaries will be affected by the amendments to PTE 86–128. 867 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 868 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 Summary of Total Cost The Department amended PTE 77–4, PTE 80–83, PTE 83–1, and PTE 86–128 by removing receipt of compensation 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 for exemptive relief covering investment advice transactions. The Department believes that since investment advice providers were already required to provide such documentation under these exemptions, these amendments will result in a de minimis change for investment advice providers. Thus, these amendments will not result in measurable additional costs. 6. Duplicate, Overlapping, or Relevant Federal Rules The rules in ERISA and the Code that govern advice on the investment of retirement assets overlap with SEC rules that govern the conduct broker-dealers that advise retail investors and the fiduciary duty imposed on investment advisers by the Advisers Act. The Department considered conduct standards set by other regulators, such as SEC, NAIC, and FINRA, in developing the final rule, with the goal of avoiding overlapping or duplicative requirements. To the extent the requirements overlap, compliance with the other disclosure or recordkeeping requirements can be used to satisfy the exemption, as long as the conditions are satisfied. 7. Description of Alternatives Considered Section 604 of the RFA requires the Department to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. This rulemaking involves predominantly small entities which required the impact on small entities to be a primary concern. The Department tried to align the requirements in this rulemaking with the requirements set by other regulators to minimize regulatory burden. Additionally, the Department has removed certain requirements in the PTEs, resulting in a lower compliance cost for fiduciary advice providers. For instance: • The Department removed the requirement of the right to obtain specific information regarding costs, fees, and compensation. Removing this requirement saved small entities $82.86 per-entity for entities already relying on PTE 2020–02, and $165.71 per-entity for E:\FR\FM\25APR4.SGM 25APR4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 entities newly reliant on PTE 2020–02 in the first year.869 • In the proposal for PTE 2020–02, the Department considered requiring a rollover disclosure for all rollovers but instead limited the disclosure to rollovers from plans to IRAs in the final exemption. The Department estimates that approximately 70 percent of rollovers are plan-to-IRA rollovers.870 The Department estimates that small Financial Institutions will no longer need to complete approximately 246,000 rollover disclosures due to this change.871 Removing this requirement will save small entities $64.60 for each rollover they conduct that is not between a plan and an IRA.872 Another $0.10 per rollover will be saved for any of these transactions that are conducted with paper disclosures. • In the final PTE 2020–02, the Department has modified the requirement for a written description of services to be more consistent with the material facts disclosure required by Regulation Best Interest. When it was separate, the description of services had a per-entity cost ranging from $96.66 per small broker-dealer to $248.66 per small Insurer in the first year.873 The Department believes that some of these costs will be absorbed from the ability of small businesses to comply with Regulation Best Interest and this rulemaking more easily through the material facts disclosure. • In PTE 84–24, the Department also removed a requirement to provide a general disclosure on commissions 869 The per-entity cost is estimated as: ($165.71 per hour × 0.5 hour) ≈ $82.86 and ($165.71 per hour × 1 hour) ≈ $165.71. A labor rate of $165.71 is used for a legal professional. 870 As discussed in the Affected Entities section of the regulatory impact analysis, the Department estimates that approximately 6.4 million rollovers occur annually, of which 4.5 million are plan-toIRA rollovers. 871 The number of plan-to-plan and IRA-to-IRA rollovers is estimated as: 6.4 million total rollovers¥4.5 million plan-to-IRA rollovers = 1.9 million rollovers. The number of adviser intermediated rollovers by small Financial Institutions is estimated as: 1.9 million rollovers × 49 percent of rollovers adviser mediated × 26.4 percent rollovers by small Financial Institutions = 245,784 rollovers. 872 The per-entity is estimated with a blended average of firms already and newly documenting rollovers. Newly documenting firms are assumed to have a burden of 0.5 hours, while already documenting firms have a burden of 5 minutes. A labor rate of $228.00 is used for a personal financial advisor. As discussed in the Cost section of the regulatory impact analysis, the Department estimates that 48% of firms already document rollovers, while 52% do not. The per-rollover cost is estimated as ((48% × 30 minutes) × $228.00) + ((52% × 5 minutes) × $228.00) = $64.60. 873 The per-entity cost is estimated as: ($165.71 per hour × 35 minutes) ≈ $96.66 and ($165.71 per hour × 1.5 hours) ≈ $248.66. A labor rate of $165.71 is used for a legal professional. VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 received, instead allowing this information to be provided to investors on request. This resulted in a per entity saving for small entities of $165.71 in the first year.874 The Department considered not amending PTE 2020–02 and leaving the exemption in its present form. The Department supports the existing PTE 2020–02 and has retained its core components in the amendment, including the Impartial Conduct Standards and the requirement for strong policies and procedures designed to mitigate conflicts of interest and ensure compliance with the exemption conditions. However, the Department believes that broadening the exemption to cover all principal transactions and robo advice, as well as providing additional protections are necessary to ensure that fiduciary investment advice providers adhere to the protective standards outlined in PTE 2020–02. Therefore, the amendments clarify and tighten the existing text of PTE 2020–02 to enhance the disclosure requirements and strengthen the disqualification provisions while also broadening the scope of the exemption so more parties can use it. For more information, refer to the preamble to amended PTE 2020– 02, also published in today’s Federal Register. The Department has sought to, where appropriate, minimize the burden of disclosure requirements in PTE 2020–02 and PTE 84–24. For instance, in PTE 2020–02 and PTE 84–24, the Department has provided model language that will satisfy more general disclosure requirements. Additionally, based on comments received on the proposal, the Department has made several adjustments to its disclosure requirements. In the final amendments, the Department has changed the requirements to provide a written description of services to be more consistent with the disclosure requirement of all material facts required on Regulation Best Interest for both PTE 2020–02 and PTE 84–24. As such, entries already complying with Regulation Best Interest will already likely be providing sufficient disclosure for this requirement. For PTE 2020–02, several commenters expressed concern about the burden and litigation risk associated with the ‘‘right to obtain specific information regarding costs, fees, and compensation’’ for Retirement Investors. At this time, the Department has decided to remove this element and align the disclosure 874 The per-entity cost is estimated as: ($165.71 per hour × 1 hour) ≈ $165.71 ≈ $165.71. A labor rate of $165.71 is used for a legal professional. PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 32255 conditions with the requirements of Regulation Best Interest, in order to provide a uniform and cost-effective approach to disclosures. For PTE 84–24, Investment Producers must still provide a notice of a Retirement Investor’s right to request additional information regarding cash compensation. The Department considered requiring Independent Producers to produce this information by default but instead decided to make this information available by request to be similar to the obligations of an Independent Producer under Section 6.A.2.a.v and 6.A.2.b of the NAIC Model Regulation 875 and requirements in the State of New York.876 The Department has considered requiring Financial Institutions to disclose the sources of third-party compensation received in connection with recommended investment products on a public web page in PTE 2020–02. When considering this requirement, the Department discussed exempting small Financial Institutions from this disclosure. In the final rulemaking, the Department has decided to not include this requirement. Based on comments received in the proposal, the Department is adding transition relief to PTEs 2020–02 and 84–24. The amended exemptions both 875 NAIC Model Regulation Section 6.A.2.a.v. provides that ‘‘[p]rior to the recommendation or sale of an annuity, the producer shall prominently disclose to the consumer . . . (v) A notice of the consumer’s right to request additional information regarding cash compensation described in Subparagraph (b) of this paragraph.’’ Section 6.A.2.b states that ‘‘[u]pon request of the consumer or the consumer’s designated representative, the producer shall disclose: (i) A reasonable estimate of the amount of cash compensation to be received by the producer, which may be stated as a range of amounts or percentages; and (ii) Whether the cash compensation is a one-time or multiple occurrence amount, and if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages.’’ 876 Section 30.3(a)(4) of Rule 194 provides that ‘‘an insurance producer selling an insurance contract shall disclose the following information to the purchaser: . . . (4) that the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale, and the compensation expected to be received based in whole or in part on any alternative quotes presented by the producer, by requesting such information from the producer.’’ If such a request is made, Section 30.3(b) requires the producer to provide the following information: ‘‘(1) a description of the nature, amount, and source of any compensation to be received . . . ; (2) a description of any alternative quotes presented by the producer . . . ; (3) a description of any material ownership interest the insurance producer . . . has in the insurer . . . ; (4) a description of any material ownership interest the insurer . . . has in the insurance producer . . . ; and (5) a statement whether the insurance producer is prohibited by law from altering the amount of compensation received from the insurer based in whole or in part on the sale.’’ E:\FR\FM\25APR4.SGM 25APR4 32256 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations have an Applicability Date 150 days (which adds 90 days to the proposed 60 days) after publication in the Federal Register. Financial Institutions and Investment Professionals will have one year after the Applicability Date before they are responsible for full compliance. This transition relief is available for all sizes of Financial Institutions that will rely on the exemptions; however, the additional time to comply with the requirements will likely be particularly beneficial for smaller entities with fewer resources to ensure compliance. lotter on DSK11XQN23PROD with RULES4 P. Unfunded Mandate Reform Act Title II of the Unfunded Mandates Reform Act of 1995 877 (UMRA) requires each Federal agency to prepare a written statement assessing the effects of any Federal mandate in a proposed or final rule that may result in an expenditure of $100 million or more (adjusted annually for inflation with the base year 1995) in any one year by State, local, and Tribal governments, in the aggregate, or by the private sector. That threshold is approximately $183 million in 2024. For purposes of the Unfunded Mandates Reform Act, this rulemaking is expected to have an impact on the private sector. For the purposes of the rulemaking, the regulatory impact analysis shall meet the UMRA obligations. Q. Federalism Statement Executive Order 13132 outlines the fundamental principles of federalism. It also requires Federal agencies to adhere to specific criteria in formulating and implementing policies that have ‘‘substantial direct effects’’ on the States, the relationship between the National Government and States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with State and local officials throughout the process of developing the regulation. As discussed throughout this analysis, this regulatory action would affect the insurance industry pertaining to annuities. These entities are also regulated by States, many of whom, as discussed in the discussion of the regulatory baseline, have taken regulatory or legislative actions. The Department has carefully considered the regulatory landscape in the States and worked to ensure that its regulations would not impose obligations on 877 Unfunded Mandates Reform Act of 1995, Public Law 104–4, 109 Stat. 48, (1995). VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 advisers or the insurance industry that are inconsistent with their responsibilities under State law, including the obligations imposed in States that based their laws on the NAIC Model Regulation. Nor would these regulations impose obligations or costs on the State regulators. As discussed above, however, the Department has increased the protections afforded by many of these laws, consistent with its own responsibilities under ERISA, and has endeavored to lend greater uniformity on the provision of advice to Retirement Investors, so that advisers covered by the rule must all abide by a uniform fiduciary standard. The Department has had discussions with State insurance regulators and Stateregulated parties about these issues including the need to ensure that Retirement Investors have sufficient protection when receiving investment advice. The Department does not intend these final rules 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 securities, banking, or insurance laws. Ultimately, the Department does not believe this final rule has federalism implications because it has no substantial direct effect on the States, on the relationship between the National government and the States, or on the distribution of power and responsibilities among the various levels of government. The Department intends to work with State insurance regulators as we move forward with implementation to ensure that this regulation complements the protections provided by the NAIC Model Regulation. The Department also intends to continue to work with State securities regulators. Authority This regulation is finalized pursuant to the authority in section 505 of ERISA (Pub. L. 93–406, 88 Stat. 894 (Sept. 2, 1974); 29 U.S.C. 1135) and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713 (Oct. 17, 1978)), 3 CFR, 1978 Comp. 332, effective December 31, 1978 (44 FR 1065 (Jan. 3, 1979)), 3 CFR, 1978 Comp. 332, 5 U.S.C. App. 237, and under Secretary of Labor’s Order No. 1– 2011, 77 FR 1088 (Jan. 9, 2012). List of Subjects in 29 CFR Part 2510 Employee benefit plans, Employee retirement income security act, Pensions, Plan assets. For the reasons set forth in the preamble, the Department amends part 2510 of subchapter B of chapter XXV of PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 title 29 of the Code of Federal Regulations as follows: PART 2510—DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, AND L OF THIS CHAPTER 1. The authority citation for part 2510 is revised to read as follows: ■ Authority: 29 U.S.C. 1002(1)–(8), 1002(13)–(16), 1002(20), 1002(21), 1002(34), 1002(37), 1002(38), 1002(40)–(44), 1031, and 1135; Div. O, Title I, Sec. 101, Pub. L. 116– 94, 133 Stat. 2534 (Dec. 20, 2019); Div. T, Title I, Sec. 105, Pub. L. 117–328, 136 Stat. 4459 (Dec. 29, 2022); Secretary of Labor’s Order 1–2011, 77 FR 1088 (Jan. 9, 2012); Secs. 2510.3–21, 2510.3–101 and 2510.3–102 also issued under Sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 752 (2018) (E.O. 12108, 44 FR 1065 (Jan. 3, 1979)), and 29 U.S.C. 1135 note. Section 2510.3–38 also issued under Sec. 1(b) Pub. L. 105–72, 111 Stat. 1457 (Nov. 10, 1997). 2. Revise § 2510.3–21 to read as follows: ■ § 2510.3–21 Definition of ‘‘Fiduciary.’’ (a)–(b) [Reserved] (c) Investment advice. (1) For purposes of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (ERISA), section 4975(e)(3)(B) of the Internal Revenue Code (Code), and this paragraph, a person renders ‘‘investment advice’’ with respect to moneys or other property of a plan or IRA if the person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property (as defined in paragraph (f)(10) of this section) to a retirement investor (as defined in paragraph (f)(11) of this section), and either paragraph (c)(1)(i) or (ii) of this section are satisfied: (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 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 (ii) The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title E:\FR\FM\25APR4.SGM 25APR4 lotter on DSK11XQN23PROD with RULES4 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations II of ERISA, or both, with respect to the recommendation. (iii) A person does not provide ‘‘investment advice’’ within the meaning of this paragraph (c)(1)(iii) if they make a recommendation but neither paragraph (c)(1)(i) nor (c)(1)(ii) of this section is satisfied. For example, a salesperson’s recommendation to purchase a particular investment or pursue a particular investment strategy is not investment advice if the person does not represent or acknowledge that they are acting as a fiduciary under ERISA Title I or Title II with respect to the recommendation and if the circumstances would not 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. Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of this rule. (iv) Written statements by a person disclaiming status as a fiduciary under ERISA Title I or Title II, or this section, or disclaiming the conditions set forth in paragraph (c)(1)(i) of this section, 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. (2) A person who is a fiduciary with respect to a plan or IRA by reason of rendering investment advice (as defined in paragraph (c)(1) of this section) for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan or IRA, or having any authority or responsibility to do so, shall not be deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which such person does not have any discretionary authority, discretionary control, or discretionary responsibility, does not exercise any authority or control, does not render investment advice (as defined in paragraph (c)(1) of this section) for a fee or other compensation, and does not have any authority or responsibility to render such investment advice, provided that nothing in this paragraph shall be deemed to: (i) Exempt such person from the provisions of section 405(a) of ERISA concerning liability for fiduciary VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 breaches by other fiduciaries with respect to any assets of the plan; or (ii) Exclude such person from the definition of the term ‘‘party in interest’’ (as set forth in section 3(14)(B) of ERISA) or ‘‘disqualified person’’ (as set forth in section 4975(e)(2) of the Code) with respect to any assets of the plan or IRA. (d) Execution of securities transactions. (1) A person who is a broker or dealer registered under the Securities Exchange Act of 1934, a reporting dealer who makes primary markets in securities of the United States Government or of an agency of the United States Government and reports daily to the Federal Reserve Bank of New York its positions with respect to such securities and borrowings thereon, or a bank supervised by the United States or a State, shall not be deemed to be a fiduciary, within the meaning of section 3(21)(A) of ERISA or section 4975(e)(3) of the Code, with respect to a plan or an IRA solely because such person executes transactions for the purchase or sale of securities on behalf of such plan or IRA in the ordinary course of its business as a broker, dealer, or bank, pursuant to instructions of a fiduciary with respect to such plan or IRA, if: (i) Neither the fiduciary nor any affiliate of such fiduciary is such broker, dealer, or bank; and (ii) The instructions specify: (A) The security to be purchased or sold, (B) A price range within which such security is to be purchased or sold, or, if such security is issued by an openend investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1, et seq.), a price which is determined in accordance with Rule 22c–1 under the Investment Company Act of 1940 (17 CFR 270.22c– 1), (C) A time span during which such security may be purchased or sold (not to exceed five business days), and (D) The minimum or maximum quantity of such security which may be purchased or sold within such price range, or, in the case of a security issued by an open-end investment company registered under the Investment Company Act of 1940, the minimum or maximum quantity of such security which may be purchased or sold, or the value of such security in dollar amount which may be purchased or sold, at the price referred to in paragraph (d)(1)(ii)(B) of this section. (2) A person who is a broker-dealer, reporting dealer, or bank which is a fiduciary with respect to a plan or IRA solely by reason of the possession or PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 32257 exercise of discretionary authority or discretionary control in the management of the plan or IRA or the management or disposition of plan or IRA assets in connection with the execution of a transaction or transactions for the purchase or sale of securities on behalf of such plan or IRA which fails to comply with the provisions of paragraph (d)(1) of this section shall not be deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which such broker-dealer, reporting dealer or bank does not have any discretionary authority, discretionary control, or discretionary responsibility, does not exercise any authority or control, does not render investment advice (as defined in paragraph (c)(1) of this section) for a fee or other compensation, and does not have any authority or responsibility to render such investment advice, provided that nothing in this paragraph shall be deemed to: (i) Exempt such broker-dealer, reporting dealer, or bank from the provisions of section 405(a) of ERISA concerning liability for fiduciary breaches by other fiduciaries with respect to any assets of the plan; or (ii) Exclude such broker-dealer, reporting dealer, or bank from the definition of the term ‘‘party in interest’’ (as set forth in section 3(14)(B) of ERISA) or ‘‘disqualified person’’ (as set forth in section 4975(e)(2) of the Code) with respect to any assets of the plan or IRA. (e) For a fee or other compensation, direct or indirect. For purposes of section 3(21)(A)(ii) of 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 E:\FR\FM\25APR4.SGM 25APR4 32258 Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations lotter on DSK11XQN23PROD with RULES4 of’’ such transaction or service if the fee or compensation would not have been paid but for the recommended transaction or the provision of investment 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. (f) Definitions. For purposes of this section— (1) The term ‘‘affiliate’’ of a person means any person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with such person; any officer, director, partner, employee, representative, or relative (as defined in paragraph (f)(13) of this section) of such person; and any corporation or partnership of which such person is an officer, director, or partner. (2) The term ‘‘control’’ means the power to exercise a controlling influence over the management or policies of a person other than an individual. (3) The term ‘‘IRA’’ means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code. (4) The term ‘‘IRA owner’’ means, with respect to an IRA, either the person who is the owner of the IRA or the person for whose benefit the IRA was established. (5) The term ‘‘IRA fiduciary’’ means a person described in Code section 4975(e)(3) with respect to an IRA. For purposes of this section, an IRA owner or beneficiary who is merely receiving investment advice is not an IRA fiduciary. (6) The term ‘‘plan’’ means any employee benefit plan described in section 3(3) of ERISA and any plan described in section 4975(e)(1)(A) of the Code. (7) The term ‘‘plan fiduciary’’ means a person described in ERISA section (3)(21)(A) and Code section 4975(e)(3) with respect to a plan. For purposes of this section, a plan participant or VerDate Sep<11>2014 20:41 Apr 24, 2024 Jkt 262001 beneficiary who is receiving investment advice is not a ‘‘plan fiduciary’’ with respect to the plan. (8) The term ‘‘plan participant’’ or ‘‘participant’’ means, for a plan described in section 3(3) of ERISA, a person described in section 3(7) of ERISA. (9) The term ‘‘beneficiary’’ means, for a plan described in section 3(3) of ERISA, a person described in section 3(8) of ERISA. (10) The phrase ‘‘recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property’’ means 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 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. (11) The term ‘‘retirement investor’’ means a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, plan fiduciary within the meaning of ERISA section (3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with respect to the plan, or IRA fiduciary within the meaning of Code section 4975(e)(3)(A) or (C) with respect to the IRA. (12) The term ‘‘investment property’’ does not include health insurance policies, disability insurance policies, PO 00000 Frm 00138 Fmt 4701 Sfmt 9990 term life insurance policies, or other property to the extent the policies or property do not contain an investment component. (13) The term ‘‘relative’’ means a person described in section 3(15) of ERISA and section 4975(e)(6) of the Code or a sibling, or a spouse of a sibling. (g) Applicability. Effective December 31, 1978, section 102 of the Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 752 (2018), transferred the authority of the Secretary of the Treasury to promulgate regulations of the type published herein to the Secretary of Labor. Accordingly, in addition to defining a ‘‘fiduciary’’ for purposes of section 3(21)(A)(ii) of ERISA, this section applies to the parallel provision in section 4975(e)(3)(B) of the Code, which defines a ‘‘fiduciary’’ of a plan defined in Code section 4975 (including an IRA) for purposes of the prohibited transaction provisions in the Code. For example, a person who satisfies paragraphs (c)(1)(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 ERISA, a fiduciary of such a plan as defined in paragraph (f)(11), or a participant or beneficiary of such plan, including a recommendation concerning the rollover of assets currently held in a plan to an IRA, is a fiduciary subject to Title I of ERISA. (h) Continued applicability of State law regulating insurance, banking, or securities. Nothing in this section shall be construed to affect or modify the provisions of section 514 of Title I of ERISA, including the savings clause in section 514(b)(2)(A) for State laws that regulate insurance, banking, or securities. Signed at Washington, DC, this 10th day of April, 2024. Lisa M. Gomez, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor. [FR Doc. 2024–08065 Filed 4–24–24; 8:45 am] BILLING CODE 4510–29–P E:\FR\FM\25APR4.SGM 25APR4

Agencies

[Federal Register Volume 89, Number 81 (Thursday, April 25, 2024)]
[Rules and Regulations]
[Pages 32122-32258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08065]

[[Page 32121]]

Vol. 89

Thursday,

No. 81

April 25, 2024

Part IV

Department of Labor

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Employee Benefits Security Administration

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29 CFR Part 2510

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

Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules
and Regulations

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AC02

Retirement Security Rule: Definition of an Investment Advice
Fiduciary

AGENCY: Employee Benefits Security Administration, Department of Labor

ACTION: Final rule

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SUMMARY: The Department of Labor (Department) is adopting a final rule
defining when a person renders ``investment advice for a fee or other
compensation, direct or indirect'' with respect to any moneys or other
property of an employee benefit plan, for purposes of the definition of
a ``fiduciary'' in the Employee Retirement Income Security Act of 1974
(Title I of ERISA or the Act). The final rule also applies for purposes
of Title II of ERISA to the definition of a fiduciary of a plan defined
in Internal Revenue Code (Code), including an individual retirement
account or other plan identified in the Code. The Department also is
publishing elsewhere in this issue of the Federal Register amendments
to Prohibited Transaction Exemption 2020-02 (Improving Investment
Advice for Workers & Retirees) and to several other existing
administrative exemptions from the prohibited transaction rules
applicable to fiduciaries under Title I and Title II of ERISA.

DATES: This regulation is effective September 23, 2024.

FOR FURTHER INFORMATION CONTACT:
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 Hotline, at 1-866-444-EBSA (3272) or
visit the Department of Labor's website (https://www.dol.gov/agencies/ebsa).

SUPPLEMENTARY INFORMATION:

A. Executive Summary

The Department 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:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
The person represents or acknowledges that they are acting
as a fiduciary under Title I of ERISA, Title II of ERISA, or both with
respect to the recommendation.
The recommendation also must be provided ``for a fee or other
compensation, direct or indirect'' as defined in the final rule.
As compared to the previous regulatory definition, which was
finalized in 1975, the final rule better reflects the text and the
purposes of ERISA and better protects the interests of retirement
investors, consistent with the Department's mission to ensure the
security of the retirement, health, and other workplace-related
benefits of America's workers and their families.
The final rule is designed to ensure that retirement investors'
reasonable expectations are honored when they receive advice from
financial professionals who hold themselves out as trusted advice
providers. The Department's regulation fills an important gap in those
advice relationships where advice is not currently treated as fiduciary
advice under the 1975 regulation's approach to ERISA's functional
fiduciary definition. This may be the case even though the financial
professional holds themselves out as providing recommendations that are
based on review of the retirement investor's needs or circumstances and
the application of professional or expert judgment to the retirement
investor's needs or circumstances, and that can be relied upon to
advance the retirement investor's best interest.
Together with amendments to administrative exemptions (PTEs) from
the prohibited transaction rules applicable to fiduciaries under Title
I and Title II of ERISA published elsewhere in this issue of the
Federal Register, the final rule is intended to protect the interests
of retirement investors by requiring persons who are defined in the
final rule as investment advice fiduciaries to adhere to stringent
conduct standards and mitigate their conflicts of interest. The amended
PTEs' compliance obligations are generally consistent with the best
interest obligations set forth in the Securities and Exchange
Commission's (SEC) Regulation Best Interest and its Commission
Interpretation Regarding Standard of Conduct for Investment Advisers
(SEC Investment Adviser Interpretation), each released in 2019.
The Department anticipates that the most significant benefits of
the final rule and amended PTEs will stem from the application of
ERISA's fiduciary protections under Title I and Title II and PTE
conditions to all covered investment advice provided to retirement
investors. Under the final rule and amended PTEs, advice providers that
satisfy the definition of an investment advice fiduciary will be
required to adhere to the prudence standard of care, reduce retirement
investor exposure to conflicted advice that may erode investment
returns, and adopt protective conflict-mitigation requirements.\1\
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\1\ The references in this document to a ``fiduciary'' are
intended to mean an ERISA Title I and Title II fiduciary unless
otherwise stated.
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Requiring advice providers to operate in compliance with ERISA
fiduciary protections will be especially beneficial with respect to
those transactions that currently are not uniformly covered by
fiduciary protections consistent with ERISA's high standards. Those
transactions include recommendations to roll over assets from a
workplace

[[Page 32123]]

retirement plan to an IRA in those cases in which the advice provider
is not subject to Federal securities law standards and, as is often the
case, has not previously advised the customer about plan or IRA assets
on a regular basis. Other examples include investment recommendations
with respect to many commonly purchased retirement annuities, such as
fixed indexed annuities; recommendations of other investments that may
not be subject to the SEC's Regulation Best Interest, such as real
estate, certain certificates of deposit, and other bank products; and
investment recommendations to plan fiduciaries with authority or
control with respect to the plan.
A proposed rule and proposed amendments to the PTEs were released
by the Department on October 31, 2023 for notice and public comment,
and public hearings on the proposals were held on December 12 and 13,
2023. The Department has made certain changes and clarifications in the
final rule in response to public comments on the proposal and the
testimony presented at the public hearings. The final rule narrows the
contexts in which a covered recommendation will constitute ERISA
fiduciary investment advice and makes clear that the test for fiduciary
status is objective. Similarly, a new paragraph in the regulatory text
confirms that sales recommendations that do not satisfy the objective
test will not be treated as fiduciary advice, and that the mere
provision of investment information or education, without an investment
recommendation, is not advice within the meaning of the rule.
Additionally, the final rule makes clear that the rule is focused on
communications with persons with authority over plan investment
decisions (including selecting investment options for participant-
directed plans), rather than communications with financial services
providers who do not have such authority. Accordingly, the rule
excludes plan and IRA investment advice fiduciaries from the definition
of a retirement investor. As a result, an asset manager does not render
fiduciary advice simply by making recommendations to a financial
professional or firm that, in turn, will render advice to retirement
investors in a fiduciary capacity. The Department believes the final
rule, with these revisions, appropriately defines an investment advice
fiduciary to comport with reasonable investor expectations of trust and
confidence.

B. Background

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

Title I of ERISA imposes duties and restrictions on persons who are
``fiduciaries'' with respect to employee benefit plans. In particular,
fiduciaries to Title I plans must adhere to duties of prudence and
loyalty. ERISA section 404 provides that Title I plan fiduciaries must
act with the ``care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent [person] acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims,'' and that they also
must discharge their duties with respect to a plan ``solely in the
interest of the participants and beneficiaries.'' \2\
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\2\ ERISA section 404, 29 U.S.C. 1104.
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These fiduciary duties, which are rooted in the common law of
trusts, are reinforced by prohibitions against transactions involving
conflicts of interest because of the dangers such transactions pose to
plans and their participants. The prohibited transaction provisions of
ERISA, including Title II of ERISA which is codified in the Internal
Revenue Code (Code), ``categorically bar[ ]'' plan fiduciaries from
engaging in transactions deemed ``likely to injure the pension plan''
\3\ absent compliance with a prohibited transaction exemption. The
provisions include prohibitions on a fiduciary's ``deal[ing] with the
assets of the plan in his own interest or for his own account,'' and
``receiv[ing] any consideration for his own personal account from any
party dealing with such plan in connection with a transaction involving
the assets of the plan.'' \4\ Thus, ERISA requires fiduciaries who have
conflicts of interest, including from financial incentives, to comply
with protective conditions in a prohibited transaction exemption.
Congress included some statutory prohibited transaction exemptions in
ERISA and also authorized the Department to grant conditional
administrative exemptions from the prohibited transaction provisions,
but only if the Department finds that the exemption is (1)
administratively feasible for the Department, (2) in the interests of
the plan and of its participants and beneficiaries, and (3) protective
of the rights of participants and beneficiaries of such plan.\5\
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\3\ Harris Trust Sav. Bank v. Salomon Smith Barney Inc., 530
U.S. 238, 241-42 (2000) (citation and quotation marks omitted).
\4\ ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).
\5\ ERISA section 408(a), 29 U.S.C. 1108(a).
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Title II of ERISA, codified in the Code,\6\ governs the conduct of
fiduciaries to plans defined in Code section 4975(e)(1), which includes
IRAs.\7\ Some plans defined in Code section 4975(e)(1) are also covered
by Title I of ERISA, but the definitions of such plans are not
identical. Although Title II, as codified in the Code, does not
directly impose specific duties of prudence and loyalty on fiduciaries
as in ERISA section 404(a), it prohibits fiduciaries from engaging in
conflicted transactions on many of the same terms as Title I.\8\ Under
the Reorganization Plan No. 4 of 1978, which Congress subsequently
ratified in 1984,\9\ Congress generally granted the Department
authority to interpret the fiduciary definition and issue
administrative exemptions from the prohibited transaction provisions in
Code section 4975.\10\
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\6\ This preamble discussion includes some references to the
Code in the context of discussions of Title II of ERISA involving
specific provisions codified in the Code. The Department understands
that references to the Code are useful but emphasizes that both
Title I and Title II are covered by the same general definition of
fiduciary and the same general framework of prohibited transactions,
and that, under both Title I and Title II, fiduciaries must comply
with the conditions of an available prohibited transaction exemption
in order to engage in an otherwise prohibited transaction.
\7\ For purposes of the final rule, the term ``IRA'' is defined
as any account or annuity described in Code section 4975(e)(1)(B)-
(F), and includes individual retirement accounts, individual
retirement annuities, health savings accounts, and certain other
tax-advantaged trusts and plans. However, for purposes of any
rollover of assets between a Title I plan and an IRA described in
this preamble, the term ``IRA'' includes only an account or annuity
described in Code section 4975(e)(1)(B) or (C). Additionally, while
the Department uses the term ``retirement investor'' throughout this
document to describe advice recipients, that is not intended to
suggest that the fiduciary definition applies only with respect to
employee pension benefit plans and IRAs that are retirement savings
vehicles. As discussed herein, the final rule applies with respect
to plans as defined in Title I and Title II of ERISA that make
investments. In this regard, see also paragraph (f)(12) that
provides that the term ``investment property'' ``does not include
health insurance policies, disability insurance policies, term life
insurance policies, or other property to the extent the policies or
property do not contain an investment component.''
\8\ 26 U.S.C. 4975(c)(1); cf. id. at 4975(f)(5), which defines
``correction'' with respect to prohibited transactions as placing a
plan or an IRA in a financial position not worse than it would have
been in if the person had acted ``under the highest fiduciary
standards.''
\9\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\10\ 5 U.S.C. App. 752 (2018).
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Many of the protections, duties, and liabilities in both Title I
and Title II of ERISA hinge on fiduciary status. ERISA includes a
statutory definition of a

[[Page 32124]]

fiduciary at section 3(21)(A), which provides that a person is a
fiduciary with respect to a plan to the extent the person (i) exercises
any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control
respecting management or disposition of its assets, (ii) renders
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) has any discretionary
authority or discretionary responsibility in the administration of such
plan.\11\ The same definition of a fiduciary is in Code section
4975(e)(3).\12\
---------------------------------------------------------------------------

\11\ ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A).
\12\ 26 U.S.C. 4975(e)(3).
---------------------------------------------------------------------------

These statutory definitions broadly assign fiduciary status for
purposes of Title I and Title II of ERISA. Thus, ``any authority or
control'' over plan assets is sufficient to confer fiduciary status,
and any person who renders ``investment advice for a fee or other
compensation, direct or indirect'' is an investment advice fiduciary,
regardless of whether they have direct control over the plan's assets,
and regardless of their status under another statutory or regulatory
regime. In the absence of fiduciary status, persons who provide
investment advice to retirement investors would neither be subject to
Title I of ERISA's fundamental fiduciary standards, nor responsible
under Title I and Title II of ERISA for avoiding prohibited
transactions. The broad statutory definition, the prohibitions on
conflicts of interest, and the core fiduciary obligations of prudence
and loyalty (as applicable) all reflect Congress' recognition in 1974,
when it passed ERISA, of the fundamental importance of investment
advice to protect the interests of retirement investors.
In 1975, shortly after ERISA was enacted, the Department issued a
regulation at 29 CFR 2510.3-21(c)(1) (the 1975 regulation) that defined
the circumstances under which a person renders ``investment advice'' to
an employee benefit plan within the meaning of ERISA section
3(21)(A)(ii), such that the person would be a fiduciary under
ERISA.\13\ The 1975 regulation significantly narrowed the plain and
expansive language of ERISA section 3(21)(A)(ii), creating a five-part
test that must be satisfied in order for a person to be treated as a
fiduciary by reason of rendering investment advice. Under the five-part
test, a person is a fiduciary only if they: (1) render advice as to the
value of securities or other property, or make recommendations as to
the advisability of investing in, purchasing, or selling securities or
other property (2) on a regular basis (3) pursuant to a mutual
agreement, arrangement, or understanding with the plan or a plan
fiduciary that (4) the advice will serve as a primary basis for
investment decisions with respect to plan assets, and that (5) the
advice will be individualized based on the particular needs of the
plan. At the time the 1975 regulation was issued, the Department of the
Treasury had sole regulatory authority over Code section 4975(e)(3),
and issued a virtually identical regulation, 26 CFR 54.4975-9(c)(1),
which applies to plans defined in Code section 4975.\14\
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\13\ 40 FR 50842 (Oct. 31, 1975).
\14\ 40 FR 50840 (Oct. 31, 1975). The issuance of this 1975
regulation pre-dated The Reorganization Plan No. 4 of 1978, and thus
authority to issue this regulatory definition under Title II of
ERISA was still with the Department of the Treasury.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

The shift toward individual control over retirement investing (and
the associated shift of risk to individuals) has been accompanied by a
dramatic increase in the variety and complexity of financial products
and services, which has widened the information gap between investment
advice providers and their clients. Plan participants and other
retirement investors may be unable to assess the quality of the advice
they receive and may not be in a position to learn of and guard against
the investment advice provider's conflicts of interest.\16\ However, as
a result of the five-part test in the 1975 regulation, and its limiting
interpretation of ERISA's statutory, functional fiduciary definition,
many financial professionals, consultants, and financial advisers have
no legal obligation to adhere to the fiduciary standards in Title I of
ERISA or to the prohibited transaction rules in Title I and Title II of
ERISA, despite the critical role these professionals, consultants and
advisors play in guiding plan and IRA investments. In many situations,
this disconnect undermines the reasonable expectations of retirement
investors in today's marketplace; a retirement investor may reasonably
expect that the advice they are receiving from a trusted adviser is
fiduciary advice even when, under the 1975 regulation's interpretation,
it is not. If these investment advice providers are not fiduciaries
under Title I or Title II of ERISA, they do not have obligations under
Federal pension law to either avoid prohibited transactions or comply
with the protective conditions in a PTE.
---------------------------------------------------------------------------

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

Recently, other regulators have recognized the need for change in
the regulation of investment recommendations and have imposed enhanced
conduct standards on financial professionals who make investment
recommendations, including broker-dealers and insurance agents. As a
result, the regulatory landscape today is very different than it was
even five years ago. In 2019, the SEC adopted Regulation Best Interest,
which established an enhanced best interest standard of conduct
applicable to broker-dealers when making a recommendation of any
securities transaction or investment strategy involving securities to
retail customers.\17\ The SEC also issued its SEC Investment Adviser
Interpretation

[[Page 32125]]

in 2019, which addressed the conduct standards applicable to investment
advisers under the Investment Advisers Act of 1940 (Advisers Act).\18\
Describing these actions, the SEC has said, ``key elements of the
standard of conduct that applies to broker-dealers under Regulation
Best Interest will be substantially similar to key elements of the
standard of conduct that applies to investment advisers pursuant to
their fiduciary duty under the Advisers Act.'' \19\ In this connection,
the SEC has also stressed that Regulation Best Interest ``aligns the
standard of conduct with retail customers' reasonable expectations.''
\20\
---------------------------------------------------------------------------

\17\ Regulation Best Interest: The Broker-Dealer Standard of
Conduct, 84 FR 33318 (July 12, 2019) (Regulation Best Interest
release).
\18\ 84 FR 33669 (July 12, 2019).
\19\ Regulation Best Interest release, 84 FR 33318, 33330 (July
12, 2019); see also Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Care Obligation, (``[b]oth
[Regulation Best Interest] for broker-dealers and the [Advisers Act]
fiduciary standard for investment advisers are drawn from key
fiduciary principles that include an obligation to act in the retail
investor's best interest and not to place their own interests ahead
of the investor's interest.''), https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.
\20\ Regulation Best Interest release, 84 FR 33318 (July 12,
2019).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\21\ Available at www.naic.org/store/free/MDL-275.pdf.
\22\ See https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.
\23\ See https://content.naic.org/sites/default/files/inline-files/275%20Final%20Map_2020%20Changes_March%2011%202024.pdf.
---------------------------------------------------------------------------

These regulatory efforts reflect the widespread understanding that
broker-dealers and insurance agents commonly make recommendations to
their customers for which they are compensated as a regular part of
their business; that investors rely upon these recommendations; and
that regulatory protections are important to ensure that the
recommendations are in the best interest of the retail customer (in the
case of broker-dealers) or consumers (in the case of insurance
agents).\24\ After careful review of the existing regulatory landscape,
the Department has concluded that the 1975 regulation should also be
revised to reflect current realities in light of the text and purposes
of Title I and Title II of ERISA.
---------------------------------------------------------------------------

\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/MDL-275.pdf.
---------------------------------------------------------------------------

In the current landscape, the 1975 regulation narrows the broad
statutory definition in ways that no longer serve the purposes of Title
I and Title II of ERISA to protect the interests of retirement
investors. This is especially the case given the growth of participant-
directed investment arrangements and IRAs, the conflicts of interest
associated with investment recommendations, and the pressing need for
plan participants, IRA owners, and their beneficiaries to receive sound
advice from professional financial advisers when making critical
investment decisions in an increasingly complex financial marketplace.
As the SEC and NAIC recognized, many different types of financial
professionals, including insurance agents, broker-dealers, investment
advisers subject to the Advisers Act, and others, make recommendations
to investors for which they are compensated, and investors rightly rely
upon these recommendations with an expectation that they are receiving
advice that is in their best interest. Like these other regulators, the
Department has concluded that it is appropriate to update the existing
regulatory structure to ensure that it properly protects the financial
interests of retirement investors as Congress intended. As reflected in
this regulatory package, after evaluation of the types of investment
advisory relationships that should give rise to ERISA fiduciary status,
the Department has concluded that it is appropriate to revise the
regulatory definition of an investment advice fiduciary under Title I
and Title II of ERISA in the manner set forth herein.

2. Prior Rulemakings

The Department began the process of reexamining the regulatory
definition of an investment advice fiduciary under Title I and Title II
of ERISA in 2010. After issuing two notices of proposed rulemaking,
conducting multiple days of public hearings, and over six years of
deliberations, on April 8, 2016, the Department replaced the 1975
regulation with a new regulatory definition of a fiduciary under ERISA
(the 2016 Final Rule) which applied under Title I and Title II of
ERISA.\25\ In the preamble to the 2016 Final Rule, the Department noted
that the 1975 regulation's five-part test had been created in a very
different context and investment advice marketplace.\26\ The Department
expressed concern that specific elements of the five-part test--which
are not found in the text of Title I or Title II of ERISA--worked to
defeat retirement investors' legitimate expectations when they received
investment advice from trusted advice providers in the modern
marketplace for financial advice.\27\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

The Department identified the ``regular basis'' element \28\ in the
five-part test as a particularly important example of the 1975
regulation's shortcomings.\29\ The Department stated that the
requirement that advice be provided on a ``regular basis'' had failed
to draw a sensible line between fiduciary and non-fiduciary conduct and
had undermined ERISA's protective purpose.\30\ The Department pointed
to examples of transactions in which a

[[Page 32126]]

discrete instance of advice can be of critical importance to the plan,
such as a one-time purchase of a group annuity to cover all of the
benefits promised to substantially all of a plan's participants for the
rest of their lives when a defined benefit plan terminates, or a plan's
expenditure of hundreds of millions of dollars on a single real estate
transaction based on the recommendation of a financial adviser hired
for purposes of that one transaction.\31\
---------------------------------------------------------------------------

\28\ This refers to the requirement in the 1975 regulation that,
in order for fiduciary status to attach, investment advice must be
provided by the person ``on a regular basis.'' See 40 FR 50842 (Oct.
31, 1975).
\29\ Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 FR at 20955.
\30\ Id.
\31\ Id.
---------------------------------------------------------------------------

The Department likewise expressed concern that the requirements in
the 1975 regulation of a ``mutual agreement, arrangement, or
understanding'' that advice would serve as ``a primary basis for
investment decisions'' had encouraged investment advice providers in
the current marketplace to use fine print disclaimers as potential
means of avoiding ERISA fiduciary status, even as they marketed
themselves as providing tailored or individualized advice based on the
retirement investor's best interest.\32\ Additionally, the Department
noted that the ``primary basis'' element of the five-part test appeared
in tension with the statutory text and purposes of Title I and Title II
of ERISA.\33\ If, for example, a prudent plan fiduciary hires multiple
specialized advisers for an especially complex transaction, it should
be able to rely upon any or all of the consultants that it hired to
render advice, regardless of arguments about whether one could
characterize the advice, in some sense, as primary, secondary, or
tertiary.\34\
---------------------------------------------------------------------------

\32\ Id.
\33\ Id.
\34\ Id. at 20955-56.
---------------------------------------------------------------------------

The 2016 Final Rule defined an investment advice fiduciary for
purposes of Title I and Title II of ERISA in a way that would apply
fiduciary status in a wider array of advice relationships than the
five-part test in the 1975 regulation.\35\ The 2016 Final Rule
generally covered: (1) recommendations by a person who represents or
acknowledges that they are acting as a fiduciary within the meaning of
ERISA; (2) advice rendered pursuant to a written or verbal agreement,
arrangement or understanding that the advice is based on the particular
investment needs of the retirement investor; and, most expansively, (3)
recommendations directed to a specific retirement investor or investors
regarding the advisability of a particular investment or management
decision with respect to securities or other investment property of the
plan or IRA.\36\
---------------------------------------------------------------------------

\35\ Id. at 20946.
\36\ Id. at 20997.
---------------------------------------------------------------------------

The 2016 Final Rule also specifically superseded a 2005 Advisory
Opinion, 2005-23A (commonly known as the Deseret Letter) which had
opined that it is not fiduciary investment advice under Title I of
ERISA to make a recommendation as to distribution options from an
employee benefit plan, even if accompanied by a recommendation as to
where the distribution would be invested.\37\
---------------------------------------------------------------------------

\37\ Id. at 20949.
---------------------------------------------------------------------------

On the same date it published the 2016 Final Rule, the Department
also published two new administrative class exemptions from the
prohibited transaction provisions of Title I and Title II of ERISA: the
Best Interest Contract Exemption (BIC Exemption) \38\ and the Class
Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
(Principal Transactions Exemption).\39\ The Department granted the new
exemptions with the objective of promoting the provision of investment
advice that is in the best interest of retail investors such as plan
participants and beneficiaries, IRA owners and beneficiaries, and
certain plan fiduciaries, including small plan sponsors.\40\
---------------------------------------------------------------------------

\38\ 81 FR 21002 (Apr. 8, 2016).
\39\ 81 FR 21089 (Apr. 8, 2016).
\40\ 81 FR 21002 (April 8, 2016).
---------------------------------------------------------------------------

The new exemptions included conditions designed to protect the
interests of the retirement investors receiving advice.\41\ The
exemptions required investment advice fiduciaries to adhere to the
following ``Impartial Conduct Standards'': providing advice in
retirement investors' best interest; charging no more than reasonable
compensation; and making no misleading statements about investment
transactions and other important matters.\42\ In the case of IRAs and
non-Title I plans, the exemption required these standards to be set
forth in an enforceable contract with the retirement investor, which
also was required to include certain warranties and disclosures.\43\
The exemption further provided that parties could not rely on the
exemption if they included provisions in their contracts disclaiming
liability for compensatory remedies or waiving or qualifying retirement
investors' right to pursue a class action or other representative
action in court.\44\ In conjunction with the new exemptions, the
Department also made amendments to pre-existing exemptions, namely PTEs
75-1, 77-4, 80-83, 83-1, 84-24 and 86-128, to require compliance with
the Impartial Conduct Standards and to make certain other changes.\45\
---------------------------------------------------------------------------

\41\ Best Interest Contract Exemption, 81 FR 21002; see also
ERISA section 408(a); Code section 4975(c)(2).
\42\ Best Interest Contract Exemption, 81 FR at 21077.
\43\ Id. at 21076.
\44\ Id. at 21078-9.
\45\ 81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81
FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016).
---------------------------------------------------------------------------

3. Litigation Over the 2016 Rulemaking

The 2016 Final Rule and related new and amended exemptions
(collectively, the 2016 Rulemaking) was challenged in multiple
lawsuits. In National Association for Fixed Annuities v. Perez, a
district court in the District of Columbia upheld the 2016 Rulemaking
in the context of a broad challenge on multiple grounds.\46\ Among
other things, the court found that the 2016 Final Rule comports with
both the text and the purpose of ERISA, and it noted ``if anything, it
is the five-part test--and not the current rule--that is difficult to
reconcile with the statutory text. Nothing in the phrase `renders
investment advice' suggests that the statute applies only to advice
provided `on a regular basis.' '' \47\ Relatedly, in Market Synergy v.
United States Department of Labor, the U.S. Court of Appeals for the
Tenth Circuit affirmed a district court's decision similarly upholding
the 2016 Rulemaking as it applied to fixed indexed annuities.\48\
---------------------------------------------------------------------------

\46\ Nat'l Assoc. for Fixed Annuities v. Perez, 217 F.Supp.3d 1
(D.D.C. 2016) [hereinafter NAFA]. On December 15, 2016, the U.S.
Court of Appeals for the District of Columbia denied an emergency
request to stay application of the definition or the exemptions
pending an appeal of the district court's ruling. Nat'l Assoc. for
Fixed Annuities v. Perez, No. 16-5345, 2016 BL 452075 (D.C. Cir.
2016).
\47\ NAFA, 217 F. Supp. 3d at 23, 27-28.
\48\ 885 F.3d 676 (10th Cir. 2018); see Thrivent Financial for
Lutherans v. Acosta, No. 16-CV-03289, 2017 WL 5135552 (D. Minn. Nov.
3, 2017) (granting the Department's motion for a stay and the
plaintiff's motion for a preliminary injunction, with respect to
Thrivent's suit challenging the BIC Exemption's bar on class action
waivers as exceeding the Department's authority and as unenforceable
under the Federal Arbitration Act).
---------------------------------------------------------------------------

On March 15, 2018, however, the U.S. Court of Appeals for the Fifth
Circuit (Fifth Circuit) overturned a district court's decision
upholding the validity of the 2016 Final Rule \49\ and vacated the
entire 2016 Rulemaking, in Chamber of Commerce v. United States
Department

[[Page 32127]]

of Labor (Chamber).\50\ The Fifth Circuit held that the 2016 Final Rule
conflicted with ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B). Specifically, the Fifth Circuit found that the 2016
Final Rule swept too broadly and extended to relationships that lacked
``trust and confidence,'' which the court stated were hallmarks of the
common-law fiduciary relationship that Congress intended to incorporate
into the statutory definitions. The court concluded that ``all relevant
sources indicate that Congress codified the touchstone of common-law
fiduciary status--the parties' underlying relationship of trust and
confidence--and nothing in the statute `requires' departing from the
touchstone.'' \51\
---------------------------------------------------------------------------

\49\ Chamber of Commerce v. Hugler, 231 F. Supp. 3d 152 (N.D.
Tex. Feb. 8, 2017) (finding, among other things, that in the 2016
Final Rule, the Department reasonably removed the ``regular basis''
requirement; and noting, ``if anything, however, the five-part test
is the more difficult interpretation to reconcile with who is a
fiduciary under ERISA.'').
\50\ 885 F.3d 360 (5th Cir. 2018); but see id. at 391 (``Nothing
in the phrase `renders investment advice for a fee or other
compensation' suggests that the statute applies only in the limited
context accepted by the panel majority.'') (Stewart, C.J.,
dissenting).
\51\ Id. at 369; but see Mertens v. Hewitt Associates, 508 U.S.
248, 262 (1993) (finding that Congress intentionally departed from
the common law of trusts by defining an ERISA `` `fiduciary' not in
terms of formal trusteeship, but in functional terms . . . thus
expanding the universe of persons subject to fiduciary duties'')
(citations omitted).
---------------------------------------------------------------------------

In addition to holding that the 2016 Final Rule conflicted with the
statutory definitions in Title I and Title II of ERISA, the Fifth
Circuit in Chamber also determined that the 2016 Rulemaking failed to
honor the difference in the Department's authority over employee
benefit plans under Title I of ERISA and IRAs under Title II, by
imposing ``novel and extensive duties and liabilities on parties
otherwise subject only to the prohibited transactions penalties.'' \52\
These included the conditions of the BIC Exemption and Principal
Transactions Exemption that required financial institutions and
individual fiduciary advisers to enter into contracts with their
customers with specific duties, warranties, and disclosures, and
forbade damages limitations and class action waivers. Under the Code,
IRA investors do not have a private right of action. Instead, the
primary remedy for a violation of the prohibited transaction provisions
under the Code is the assessment of an excise tax.\53\ In the Fifth
Circuit's view, the Department had effectively exceeded its authority
by giving IRA investors the ability to bring a private cause of action
that Congress had not authorized.\54\
---------------------------------------------------------------------------

\52\ Chamber, 885 F.3d at 384.
\53\ Code section 4975(a), (b).
\54\ Chamber, 885 F.3d at 384.
---------------------------------------------------------------------------

In response to the Fifth Circuit's vacatur of the 2016 Rulemaking,
on May 7, 2018, the Department issued Field Assistance Bulletin 2018-
02, Temporary Enforcement Policy on Prohibited Transactions Rules
Applicable to Investment Advice Fiduciaries (FAB 2018-02).\55\ FAB
2018-02 announced that, pending further guidance, the Department would
not pursue prohibited transaction claims against fiduciaries who were
working diligently and in good faith to comply with the Impartial
Conduct Standards for transactions that would have been exempted in the
BIC Exemption and Principal Transactions Exemption, or treat such
fiduciaries as violating the applicable prohibited transaction rules.
---------------------------------------------------------------------------

\55\ Available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02.
---------------------------------------------------------------------------

4. Subsequent Actions by the Department

In 2020, the Department issued a technical amendment to the Code of
Federal Regulations (CFR) reinserting the 1975 regulation, reflecting
the Fifth Circuit's vacatur of the 2016 Final Rule.\56\ The technical
amendment also reinserted into the CFR Interpretive Bulletin 96-1 (IB
96-1) relating to participant investment education, which had been
removed and largely incorporated into the text of the 2016 Final Rule.
Additionally, the Department updated its website to reflect the fact
that the pre-existing prohibited transaction exemptions that had been
amended in the 2016 Rulemaking had been restored to their pre-amendment
form, and also to reflect that the Department had withdrawn the Deseret
Letter.
---------------------------------------------------------------------------

\56\ 85 FR 40589 (July 7, 2020).
---------------------------------------------------------------------------

The Department also adopted a new PTE, Improving Investment Advice
for Workers & Retirees, also known as PTE 2020-02.\57\ The exemption
provides relief that is similar in scope to the BIC Exemption and the
Principal Transactions Exemption, but it does not include contract or
warranty provisions.
---------------------------------------------------------------------------

\57\ 85 FR 82798 (Dec. 18, 2020).
---------------------------------------------------------------------------

The preamble to PTE 2020-02 also included the Department's
interpretation of when advice to roll over assets from a workplace
retirement plan to an IRA would constitute fiduciary investment advice
under the 1975 regulation's five-part test.\58\ The preamble
interpretation confirmed the Department's continued view that the
Deseret Letter was incorrect, and that a recommendation to roll assets
out of a Title I plan is advice with respect to moneys or other
property of the plan and, if provided by a person who satisfies all of
the requirements of the 1975 regulatory test, constitutes fiduciary
investment advice.\59\ The preamble interpretation also discussed when
a recommendation to roll over assets from an employee benefit plan to
an IRA would satisfy the ``regular basis'' requirement.\60\
Additionally, the preamble set forth the Department's interpretation of
the 1975 regulation's requirement of ``a mutual agreement, arrangement,
or understanding'' that the investment advice will serve as ``a primary
basis for investment decisions.'' \61\ In April 2021, the Department
issued Frequently Asked Questions (FAQs) that, among other things,
summarized aspects of the preamble interpretation.\62\
---------------------------------------------------------------------------

\58\ Id. at 82802-9.
\59\ Id.
\60\ Id.
\61\ Id.
\62\ New Fiduciary Advice Exemption: PTE 2020-02 Improving
Investment Advice for Workers & Retirees Frequently Asked Questions,
https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.
---------------------------------------------------------------------------

The Department's preamble interpretation and certain FAQs were
challenged as inconsistent with the 1975 regulation in two lawsuits
filed after the issuance of PTE 2020-02.\63\ On February 13, 2023, the
U.S. District Court for the Middle District of Florida issued an
opinion vacating the policy referenced in FAQ 7 (entitled ``When is
advice to roll over assets from an employee benefit plan to an IRA
considered to be on a `regular basis' ? '') and remanded it to the
Department for further proceedings.\64\ On June 30, 2023, a magistrate
judge in the Northern District of Texas filed a report with the judge's
findings, conclusions, and recommendations, including a recommendation
that the court should vacate portions of PTE 2020-02 that permit
consideration of actual or expected Title II investment advice
relationships when determining Title I fiduciary status, as
inconsistent with the 1975 regulation.\65\
---------------------------------------------------------------------------

\63\ Compl., Am. Sec. Ass'n. v. U.S. Dep't of Labor, No. 8:22-
CV-330VMC-CPT, 2023 WL 1967573 (M.D. Fla. Feb. 13, 2023); Compl.,
Fed'n of Ams. for Consumer Choice v. U.S. Dep't of Labor, No. 3:22-
CV-00243-K-BT (N.D. Tex. Feb. 2, 2022).
\64\ Am. Sec. Ass'n. v. U.S. Dep't of Labor, 2023 WL 1967573, at
*22-23.
\65\ See Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, Fed'n of Ams. for Consumer Choice v.
U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at
*27-29 (N.D. Tex. June 30, 2023) [hereinafter FACC]. As of the date
of this final rule, the district court judge has not yet taken
action regarding the magistrate judge's report and recommendations.

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[[Page 32128]]

5. Other Regulatory Developments

U.S. Securities and Exchange Commission
Since the vacatur of the Department's 2016 Rulemaking, other
regulators have considered and adopted enhanced standards of conduct
for financial professionals as a method of addressing, among other
things, conflicts of interest. At the Federal level, on June 5, 2019,
the SEC finalized a regulatory package relating to conduct standards
for broker-dealers and investment advisers. The package included
Regulation Best Interest, which established an enhanced best interest
standard of conduct applicable to broker-dealers when making a
recommendation of any securities transaction or investment strategy
involving securities to retail customers.\66\
---------------------------------------------------------------------------

\66\ See Regulation Best Interest release, 84 FR 33318 (July 12,
2019).
---------------------------------------------------------------------------

The SEC's Regulation Best Interest enhanced the broker-dealer
standard of conduct ``beyond existing suitability obligations.'' \67\
According to the SEC, this
---------------------------------------------------------------------------

\67\ Id.

[A]lign[ed] the standard of conduct with retail customers'
reasonable expectations by requiring broker-dealers, among other
things, to: Act in the best interest of the retail customer at the
time the recommendation is made, without placing the financial or
other interest of the broker-dealer ahead of the interests of the
retail customer; and address conflicts of interest by establishing,
maintaining, and enforcing policies and procedures reasonably
designed to identify and fully and fairly disclose material facts
about conflicts of interest, and in instances where [the SEC has]
determined that disclosure is insufficient to reasonably address the
conflict, to mitigate or, in certain instances, eliminate the
conflict.\68\
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\68\ Id.

Regulation Best Interest's ``best interest obligation'' includes a
Disclosure Obligation, a Care Obligation, a Conflict of Interest
Obligation, and a Compliance Obligation. The Care Obligation requires
broker-dealers, in making recommendations, to exercise ``reasonable
---------------------------------------------------------------------------
diligence, care, and skill'' to:

(A) Understand the potential risks, rewards, and costs
associated with the recommendation, and have a reasonable basis to
believe that the recommendation could be in the best interest of at
least some retail customers;
(B) Have a reasonable basis to believe that the recommendation
is in the best interest of a particular retail customer based on
that retail customer's investment profile and the potential risks,
rewards, and costs associated with the recommendation and does not
place the financial or other interest of the broker, dealer, or such
natural person ahead of the interest of the retail customer; [and]
(C) Have a reasonable basis to believe that a series of
recommended transactions, even if in the retail customer's best
interest when viewed in isolation, is not excessive and is in the
retail customer's best interest when taken together in light of the
retail customer's investment profile and does not place the
financial or other interest of the broker, dealer, or such natural
person making the series of recommendations ahead of the interest of
the retail customer.\69\
---------------------------------------------------------------------------

\69\ 17 CFR 240.15l-1(a)(2)(ii).

In guidance on the care obligations applicable to both broker-
---------------------------------------------------------------------------
dealers and investment advisers, the SEC staff explained,

In the context of providing investment advice and
recommendations to retail investors, the care obligations generally
include three overarching and intersecting components. . . . [T]hese
components are:
Understanding the potential risks, rewards, and costs associated
with a product, investment strategy, account type, or series of
transactions (the ``investment or investment strategy'');
Having a reasonable understanding of the specific retail
investor's investment profile, which generally includes the retail
investor's financial situation (including current income) and needs;
investments; assets and debts; marital status; tax status; age;
investment time horizon; liquidity needs; risk tolerance; investment
experience; investment objectives and financial goals; and any other
information the retail investor may disclose in connection with the
recommendation or advice; and
Based on the understanding of the first two elements, as well
as, in the staff's view, a consideration of reasonably available
alternatives, having a reasonable basis to conclude that the
recommendation or advice provided is in the retail investor's best
interest.\70\
---------------------------------------------------------------------------

\70\ Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Care Obligations (footnotes omitted), https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.

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

(A) Identify and at a minimum disclose, [in accordance with
Regulation Best Interest], or eliminate, all conflicts of interest
associated with such recommendations;
(B) Identify and mitigate any conflicts of interest associated
with such recommendations that create an incentive for a natural
person who is an associated person of a broker or dealer to place
the interest of the broker, dealer, or such natural person ahead of
the interest of the retail customer;
(C) Identify and disclose any material limitations placed on the
securities or investment strategies involving securities that may be
recommended to a retail customer and any conflicts of interest
associated with such limitations, and prevent such limitations and
associated conflicts of interest from causing the broker, dealer, or
a natural person who is an associated person of the broker or dealer
to make recommendations that place the interest of the broker,
dealer, or such natural person ahead of the interest of the retail
customer [in accordance with Regulation Best Interest]; and
(D) Identify and eliminate any sales contests, sales quotas,
bonuses, and non-cash compensation that are based on the sales of
specific securities or specific types of securities within a limited
period of time.\71\
---------------------------------------------------------------------------

\71\ 17 CFR 240.15l-1(a)(2)(iii).

A conflict of interest is defined as ``an interest that might
incline a broker, dealer, or a natural person who is an associated
person of a broker or dealer--consciously or unconsciously--to make a
recommendation that is not disinterested.'' \72\
---------------------------------------------------------------------------

\72\ Id. at (b)(3).
---------------------------------------------------------------------------

In guidance on conflicts of interest applicable to both broker-
dealers and investment advisers, the SEC staff has stated,

All broker-dealers, investment advisers, and financial
professionals have at least some conflicts of interest with their
retail investors. Specifically, they have an economic incentive to
recommend products, services, or account types that provide more
revenue or other benefits for the firm or its financial
professionals, even if such recommendations or advice are not in the
best interest of the retail investor. . . . Consistent with their
obligation to act in a retail investor's best interest, firms must
address conflicts in a way that will prevent the firm or its
financial professionals from providing recommendations or advice
that places their interests ahead of the interests of the retail
investor.\73\
---------------------------------------------------------------------------

\73\ Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Conflict of Interest, https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

In the Regulation Best Interest Release, the SEC stated that
``[t]he Commission has crafted Regulation Best Interest to draw on key
principles underlying fiduciary obligations, including those that apply
to investment advisers under the Advisers Act, while providing specific
requirements to address certain aspects of the relationships between
broker-dealers and their retail customers.'' \74\ The SEC emphasized
that, ``[i]mportantly, regardless of whether a retail investor chooses
a broker-dealer or an investment adviser (or both), the retail investor
will be entitled to a recommendation (from a broker-dealer) or advice
(from an investment adviser) that is in the best interest of the retail
investor and that does not place the interests of the firm or the
financial

[[Page 32129]]

professional ahead of the interests of the retail investor.'' \75\ The
SEC also noted that the standard of conduct established by Regulation
Best Interest cannot be satisfied through disclosure alone.\76\
---------------------------------------------------------------------------

\74\ 84 FR 33318, 33320 (July 12, 2019).
\75\ Id. at 33321.
\76\ Id. at 33390.
---------------------------------------------------------------------------

The SEC's Regulation Best Interest applies to broker-dealers and
their associated persons when they make a recommendation to a retail
customer of any ``securities transaction or investment strategy
involving securities (including account recommendations).''
\77\According to the SEC, this language encompasses recommendations to
roll over or transfer assets in a workplace retirement plan account to
an IRA, and recommendations to take a plan distribution.\78\ However,
the SEC also stated that while Regulation Best Interest applies to
advice regarding a person's own retirement account such as a 401(k)
account or IRA, it does not cover advice to workplace retirement plans
themselves or to their legal representatives when they are receiving
advice on the plan's behalf.\79\
---------------------------------------------------------------------------

\77\ 17 CFR 240.15l-1(a)(1).
\78\ Regulation Best Interest Release, 84 FR 33318, 33337 (July
12, 2019).
\79\ Id. at 33343-44.
---------------------------------------------------------------------------

The SEC Investment Adviser Interpretation, published simultaneously
with Regulation Best Interest, reaffirmed and in some cases clarified
aspects of the fiduciary duty of an investment adviser under the
Advisers Act.\80\ The SEC stated that ``an investment adviser's
fiduciary duty under the Investment Advisers Act comprises both a duty
of care and a duty of loyalty.'' \81\ According to the SEC, ``[t]his
fiduciary duty is based on equitable common law principles and is
fundamental to advisers' relationships with their clients under the
Advisers Act.'' \82\ The fiduciary duty under the Federal securities
laws requires an adviser ``to adopt the principal's goals, objectives,
or ends.'' \83\ The SEC stated:
---------------------------------------------------------------------------

\80\ 84 FR 33669 (July 12, 2019).
\81\ Id. at 33671 (footnote omitted).
\82\ Id. at 33670.
\83\ Id. at 33671.

This means the adviser must, at all times, serve the best
interest of its client and not subordinate its client's interest to
its own. In other words, the investment adviser cannot place its own
interests ahead of the interests of its client. This combination of
care and loyalty obligations has been characterized as requiring the
investment adviser to act in the ``best interest'' of its client at
all times.\84\
---------------------------------------------------------------------------

\84\ Id. (footnote omitted).

The SEC further stated, ``[t]he investment adviser's fiduciary duty
is broad and applies to the entire adviser-client relationship.'' \85\
An investment adviser's fiduciary duty under the Advisers Act applies
to advice about whether to rollover assets from one account to another,
including rolling over from retirement accounts into an account that
will be managed by the investment adviser or an affiliate.\86\
---------------------------------------------------------------------------

\85\ Id at 33670. See also id. fn. 17 (citing authorities where
the Commission previously recognized the broad scope of section 206
of the Advisers Act in a variety of contexts).
\86\ Id. at 33674.
---------------------------------------------------------------------------

State Legislative and Regulatory Developments
Since the vacatur of the Department's 2016 Rulemaking, there have
also been legislative and regulatory developments at the State level
involving conduct standards. For instance, the Massachusetts Securities
Division amended its regulations to apply a fiduciary conduct standard
under which broker-dealers and their agents must ``[m]ake
recommendations and provide investment advice without regard to the
financial or any other interest of any party other than the customer.''
\87\
---------------------------------------------------------------------------

\87\ 950 Mass. Code Regs. 12.204 & 12.207 as amended effective
March 6, 2020; see Consent Order, In the Matter of Scottrade, Inc.,
No. E-2017-0045 (June 30, 2020); see also Enf't Section of
Massachusetts Sec. Div. of Office of Sec'y of Commonwealth v.
Scottrade, Inc., 327 F. Supp. 3d 345, 352 (D. Mass. 2018)
(discussing enforcement actions under Massachusetts securities and
other consumer protection laws). A challenge to the regulation was
rejected by the Massachusetts Supreme Judicial Court. See Robinhood
Fin. LLC v. Sec'y of Commonwealth of Mass, No. SJC-13381, 2023 WL
5490571 (Mass. Aug. 25, 2023).
---------------------------------------------------------------------------

Additionally, the NAIC Model Regulation, updated in 2020, provides
that insurance agents must act in the consumer's ``best interest,'' as
defined by the Model Regulation, when making a recommendation of an
annuity, and insurers must establish and maintain a system to supervise
recommendations so that the insurance needs and financial objectives of
consumers at the time of the transaction are effectively addressed.\88\
The NAIC Model Regulation also provides that it does not apply to
transactions involving contracts used to fund an employee pension or
welfare plan covered by ERISA.\89\ According to the NAIC, as of March
11, 2024, 45 jurisdictions have implemented the revisions to the model
regulation.\90\
---------------------------------------------------------------------------

\88\ Available at www.naic.org/store/free/MDL-275.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.
---------------------------------------------------------------------------

The NAIC Model Regulation includes a best interest obligation
comprised of a care obligation, a disclosure obligation, a conflict of
interest obligation, and a documentation obligation, applicable to an
insurance producer.\91\ If these specific obligations are met, the
producer is treated as satisfying the overarching best interest
standard as expressed in the NAIC Model Regulation. The care obligation
states that the producer, in making a recommendation, must exercise
``reasonable diligence, care and skill'' to:
---------------------------------------------------------------------------

\91\ A producer is defined in section 5.L. of the NAIC Model
Regulation as ``a person or entity required to be licensed under the
laws of this state to sell, solicit or negotiate insurance,
including annuities.'' Section 5.L. further provides that the term
producer includes an insurer where no producer is involved.

(i) Know the consumer's financial situation, insurance needs and
financial objectives;
(ii) Understand the available recommendation options after
making a reasonable inquiry into options available to the producer;
(iii) Have a reasonable basis to believe the recommended option
effectively addresses the consumer's financial situation, insurance
needs and financial objectives over the life of the product, as
evaluated in light of the consumer profile information; and
(iv) Communicate the basis or bases of the recommendation.\92\
---------------------------------------------------------------------------

\92\ NAIC Model Regulation at section 6.A.(1)(a).

The NAIC conflict of interest obligation requires the producer to
``identify and avoid or reasonably manage and disclose material
conflicts of interest, including material conflicts of interest related
to an ownership interest.'' \93\ Further, under the NAIC Model
Regulation, insurers are required to ``establish and maintain
reasonable procedures to identify and eliminate any sales contests,
sales quotas, bonuses, and non-cash compensation that are based on the
sales of specific annuities within a limited period of time.'' \94\
---------------------------------------------------------------------------

\93\ Id. at section 6.A.(3).
\94\ Id. at section 6.C.(2)(h).
---------------------------------------------------------------------------

The NAIC Model Regulation's requirements regarding mitigation of
material conflicts of interest are not as stringent as either the
Department's approach under ERISA or the SEC's approach. This is made
clear in the NAIC Model Regulation's definition of a ``material
conflict of interest'' which expressly carves out all ``cash
compensation or non-cash compensation'' from treatment as sources of
conflicts of interest.\95\ ``Cash compensation'' that is excluded from
the definition of a material conflict of interest is broadly defined to
include ``any discount, concession, fee, service fee, commission, sales
charge, loan, override, or cash benefit received by a producer in
connection with the

[[Page 32130]]

recommendation or sale of an annuity from an insurer, intermediary, or
directly from the consumer,'' and ``non-cash compensation'' is also
broadly defined to include ``any form of compensation that is not cash
compensation, including, but not limited to, health insurance, office
rent, office support and retirement benefits.'' \96\
---------------------------------------------------------------------------

\95\ Id. at section 5.I.
\96\ Id. at section 5.B. and J.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

\97\ Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Conflict of Interest, https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

compensation, revenue or other benefits (financial or otherwise) to
financial professionals from their firm or its affiliates (for
example, compensation or other rewards associated with quotas,
bonuses, sales contests, special awards; differential or variable
compensation based on the product sold, accounts recommended, AUM,
or services provided; incentives tied to appraisals or performance
reviews; forgivable loans based upon the achievement of specified
performance goals related to asset accumulation, revenue benchmarks,
client transfer, or client retention);

compensation, revenue or other benefits (financial or otherwise)
(including, but not limited to, gifts, entertainment, meals, travel,
and related benefits, including in connection with the financial
professional's attendance at third-party sponsored trainings and
conferences) to the financial professionals resulting from other
business or personal relationships the financial professional may
have, relationships with third parties that may relate to the
financial professional's association or affiliation with the firm or
with another firm (whether affiliated or unaffiliated), or other
relationships within the firm; an

compensation, revenue or other benefits (financial or otherwise) to
the firm or its affiliates resulting from the firm's or its
financial professionals' sales or offer of proprietary products or
services, or products or services of affiliates.\98\
---------------------------------------------------------------------------

\98\ Id.

The NAIC expressly disclaimed that its standard creates fiduciary
obligations, and the obligations in its Model Regulation differ in
significant respects from those applicable to broker-dealers in the
SEC's Regulation Best Interest or to investment advisers pursuant to
the Advisers Act's fiduciary duty.\99\ In addition to disregarding all
forms of compensation as a source of material conflicts of interest, as
discussed above, the NAIC Model Regulation's ``best interest'' standard
is satisfied by the four component obligations--the care, disclosure,
conflict of interest, and documentation obligations--but these
components do not expressly incorporate the best interest obligation
not to put the producer's or insurer's interests before the customer's
interests, even though compliance with the component obligations' terms
is treated as meeting the NAIC Model Regulation's ``best interest''
standard. Similarly, the NAIC Model Regulation's care obligation does
not repeat the ``best interest'' requirement but instead includes a
requirement to ``have a reasonable basis to believe the recommended
option effectively addresses the consumer's financial situation,
insurance needs and financial objectives . . . .'' \100\ Additionally,
the obligation to comply with the ``best interest'' standard is limited
to the individual producer, as opposed to the insurer responsible for
supervising the producer.
---------------------------------------------------------------------------

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

The State of New York took a different approach than the NAIC Model
Regulation in its NY Insurance Regulation 187, effective February 1,
2020. Under the New York regulation, an insurance producer acts in the
best interest of the consumer when, among other things,

the producer's . . . recommendation to the consumer is based on an
evaluation of the relevant suitability information of the consumer
and reflects the care, skill, prudence, and diligence that a prudent
person acting in a like capacity and familiar with such matters
would use under the circumstances then prevailing. Only the
interests of the consumer shall be considered in making the
recommendation. The producer's receipt of compensation or other
incentives permitted by the Insurance Law and the Insurance
Regulations is permitted by this requirement provided that the
amount of the compensation or the receipt of an incentive does not
influence the recommendation.

Thus, under New York law, insurance producers must act prudently in
making a recommendation and must not allow compensation or other
incentives to influence their recommendations. According to the
American Council of Life Insurers, out of 713 life insurers in the
United States, 81 were domiciled in New York in 2022, and annuity
direct premium receipts in New York in 2022 totaled $31.4 billion.\101\
---------------------------------------------------------------------------

\101\ ACLI 2023 Life Insurers Fact Book, https://www.acli.com/-/media/public/pdf/news-and-analysis/publications-and-research/2023-fact-book-chapters/2023aclifactbook.pdf.
---------------------------------------------------------------------------

The regulatory changes described above cover many, but not all, of
the assets held by ERISA retirement plans and IRAs. Further, the SEC's
Regulation Best Interest and the NAIC Model Regulation are each limited
in important ways in terms of their application to advice provided to
ERISA plan fiduciaries.\102\ For example, Regulation Best Interest does
not cover advice to workplace retirement plans or their representatives
(such as an employee of a small business who is a fiduciary of the
business's 401(k) plan).\103\ The NAIC Model Regulation specifically
states that it does not apply to transactions involving contracts used
to fund an employee pension or welfare plan covered by ERISA.\104\ And
there remain investments held by retirement investors in retirement
accounts that are not covered by securities laws or insurance laws,
including real estate, certain certificates of deposit and other
banking products, commodities, and precious metals. The Department
believes that retirement investors and the regulated community are best
served by ERISA fiduciary protections in Title I and Title II that
apply to all

[[Page 32131]]

investments that retirement investors may make with respect to their
retirement accounts when they receive recommendations from trusted
advice providers. Amendments to the ERISA regulation are necessary to
achieve that result.
---------------------------------------------------------------------------

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

6. Coordination With Other Agencies

Under Title I and Title II of ERISA, the Department has primary
responsibility for the regulation of ERISA fiduciaries' advice to
retirement investors. Because of the fundamental importance of
retirement investments to workers' financial security and the tax-
preferred status of plans and IRAs, Congress defined the scope of ERISA
fiduciary coverage broadly and imposed stringent obligations on ERISA
fiduciaries, including prohibitions on conflicted transactions that do
not have direct analogues under the securities and insurance laws. The
fiduciary protections and prohibited transaction rules set forth in
Title I and Title II of ERISA, as applicable, broadly apply to covered
fiduciaries, irrespective of the particular investment product they
recommend or their status as investment advisers under the Advisers
Act, broker-dealers, insurance agents, bankers, or other status. This
final rule is designed to ensure that the standards and rules
applicable under Title I and Title II of ERISA are broadly uniform as
applied to retirement investors receiving advice from a trusted advisor
across different categories of investment advice providers and advisory
relationships.
At the same time, many commenters stressed the need to harmonize
the Department's efforts with rulemaking activities by other
regulators, including the SEC's standards of care for providing
investment advice and the Commodity Futures Trading Commission's (CFTC)
business conduct standards for swap dealers (and comparable SEC
standards for security-based swap dealers). In addition, some
commenters have urged coordination with other agencies regarding IRA
products and services.
As the SEC has adopted regulatory standards for broker-dealers that
are based on fiduciary principles of care and loyalty also applicable
to investment advisers under the Advisers Act, and the NAIC has issued
a model law that includes a best interest standard, the Department
believes that it is possible to hew to the unique regulatory structure
imposed by the law governing tax-preferred retirement investments,
adopt a regulatory approach that provides a broadly uniform standard
for all retirement investors when they receive advice from a trusted
advisor, as contemplated by Title I and Title II of ERISA, and avoid
the imposition of obligations that conflict with financial
professionals' obligations under other applicable Federal and State
laws. In particular, in the Department's view, PTE 2020-02, as amended
and published elsewhere in today's Federal Register, is consistent with
the requirements of the SEC's Regulation Best Interest and the
fiduciary obligations of investment advisers under the Advisers Act.
Therefore, broker-dealers and investment advisers that have already
adopted meaningful compliance mechanisms for Regulation Best Interest
and the Advisers Act fiduciary duty, respectively, should be able to
adapt easily to comply with the amended PTE.
Nevertheless, to better understand whether the proposed rule and
proposed amendments to the PTEs would have subjected investment advice
providers to requirements that conflict with or add to their
obligations under other Federal laws, the Department has reached out to
and consulted with the staff of the SEC; other securities, banking, and
insurance regulators; \105\ the Department of the Treasury, including
the Federal Insurance Office; and the Financial Industry Regulatory
Authority (FINRA), a self-regulatory organization that oversees broker-
dealers.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

The Department has also consulted and coordinated with the
Department of the Treasury and the Internal Revenue Service (IRS),
particularly on the subject of IRAs, and will continue to do so.
Although the Department of Labor has responsibility for issuing
regulations and prohibited transaction exemptions under section 4975 of
the Code, which applies to IRAs, the IRS maintains general
responsibility for enforcing the excise tax applicable to prohibited
transactions. The IRS' responsibilities extend to the imposition of
excise taxes on fiduciaries who participate in prohibited transactions.
As a result, the Department and the IRS share responsibility for
addressing self-dealing by investment advice fiduciaries to tax-
qualified plans and IRAs.

7. Proposed Retirement Security Rule

On October 31, 2023, the Department released the proposed
Retirement Security Rule: Definition of an Investment Advice Fiduciary,
along with proposed amendments to PTE 2020-02 and proposed amendments
to other administrative prohibited transaction exemptions available to
investment advice fiduciaries.\106\ The proposed rule was designed to
ensure that protections established by Titles I and II of ERISA would
apply to all advice that retirement investors receive from trusted
advice providers concerning investment of their retirement assets in a
way that ensures that retirement investors' reasonable expectations are
honored.\107\
---------------------------------------------------------------------------

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

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

[[Page 32132]]

The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making investment
recommendations.\108\
---------------------------------------------------------------------------

\108\ Id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\109\ Id. at 75892-3, 75899-900.
---------------------------------------------------------------------------

The Department expressed the view in the proposal that when a
financial professional satisfies all five parts of the 1975 regulation
with respect to a given instance of advice, the professional is
properly treated as an investment advice fiduciary in accordance with
the parties' reasonable understanding of the nature of their
relationship.\110\ However, the 1975 regulation, as applied to the
current marketplace, is underinclusive in assigning fiduciary status
because it fails to capture many circumstances in which an investor
would reasonably expect that they can place their trust and confidence
in the advice provider as acting in their best interest. The
Department's experience in the current marketplace is that the five-
part test--in particular, the ``regular basis'' requirement and the
requirement of ``a mutual agreement, arrangement or understanding''
that the investment advice will serve as ``a primary basis for
investment decisions''--too often works to defeat legitimate retirement
investor expectations of impartial advice and allows investment advice
providers to hold themselves out as offering individualized advice that
is intended to promote the best interest of the customer, when they, in
fact, have no such obligation under the 1975 regulation's
implementation of Title I or Title II of ERISA.
---------------------------------------------------------------------------

\110\ Id. at 75899.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\111\ Id.
\112\ Id.
---------------------------------------------------------------------------

The Department stated in the proposal that an important premise of
Title I and Title II of ERISA is that fiduciaries' conflicts of
interest should not be left unchecked, but rather should be carefully
regulated through rules requiring adherence to basic fiduciary norms
and avoidance of prohibited transactions.\113\ The specific duties to
avoid conflicts of interest or comply with a prohibited transaction
exemption applicable to fiduciaries under Title I and Title II of ERISA
stem from Congress' judgment regarding the best way to protect the
public interest in tax-advantaged benefit arrangements that are
critical to workers' financial and physical health. In contrast to the
Federal laws and other regulatory regimes which can permit certain
conflicts if prescribed disclosure obligations are met, the statutory
prohibited transaction provisions in Title I and Title II of ERISA
contemplate a more stringent approach for the protection of these tax-
advantaged retirement savings. In this context, an appropriately
constructed regulatory definition of an investment advice fiduciary
under Title I and Title II of ERISA is essential.
---------------------------------------------------------------------------

\113\ Id.
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C. Overview of the Comments Received on the Proposal

The Department received over 400 individual comments and just under
20,000 petition submissions as part of 14 separate petitions on the
proposal. These comments and petitions came from consumer groups,
financial services companies, academics, trade and industry
associations, and others, both in support of, and in opposition to, the
proposed rule and proposed amendments to the PTEs.\114\
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\114\ The 2023 proposed rule and proposed amendments to the PTEs
provided for a 60-day comment period which ended on January 2, 2024.
The Department held a virtual public hearing on December 12-13,
2023, at which over 40 witnesses testified. The Department posted a
video recording of the virtual public hearing on its website on
December 19, 2023, an unofficial hearing transcript on December 22,
2023, and the official hearing transcript on January 10, 2024.
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Commenters on the proposal generally agreed that as a result of the
shift from defined benefit plans to 401(k)-type individual account
retirement plans, retirement investors today face increased
responsibility for ensuring their own secure retirement.\115\
Commenters cited studies indicating that many Americans are concerned
that they will not have saved enough money to achieve that goal.\116\
Many commenters discussed the related importance of retirement
investors' access to professional investment advice. In connection with
these points, some commenters said the proposed update to the
investment advice fiduciary definition would provide important
protections that would support retirement investors' access to
investment advice intended to advance their interests. Other commenters
said the proposed update to the investment advice fiduciary definition
was not necessary and that the scope of the proposed definition
exceeded the Department's jurisdiction and could reduce access to
advice. These comments and the Department's responses are discussed in
this preamble Section C. Comments on specific provisions of the
proposal are discussed in preamble Section D.
---------------------------------------------------------------------------

\115\ References to ``comments'' and ``commenters'' in this
preamble generally include written comments, petitions, and hearing
testimony.
\116\ See, e.g., Board of Governors of the Federal Reserve
System, ``Economic Well-Being of U.S. Households in 2022'' 67 May
2023, available at https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.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.'')
---------------------------------------------------------------------------

1. Comments Supporting the Proposal

Commenters supporting the proposal echoed many of the concerns
expressed by the Department in the proposal's preamble. These
commenters emphasized the need to update the 1975 regulation to better
align with retirement investor expectations in today's retirement
investment marketplace and to fill important gaps in advice
relationships where advice is not currently required to be provided in
the retirement investor's best interest

[[Page 32133]]

and the investor may not be aware of that fact.
Some commenters expressed specific support for applying ERISA
fiduciary protections to recommendations to roll over assets from a
workplace retirement plan to an IRA, in light of the significant
consequences of that decision. They also expressed support for applying
ERISA fiduciary protections to recommendations to plan fiduciaries
where, currently, advice regarding plan investment options may not be
considered to occur on a regular basis, and therefore would not be
considered ERISA fiduciary advice. Commenters said many employers, even
larger employers, are not necessarily knowledgeable about selecting
prudent investment options for the plans they sponsor.
Commenters also said an updated regulatory definition of an
investment advice fiduciary would protect retirement investors from
harm caused by conflicts of interest. They said conflicts of interest
can expose savers to higher costs, lower returns, and greater risk.
Some commenters emphasized that retirement investors with modest
balances are more vulnerable to harm from conflicted investment advice,
as the high fees would disproportionately diminish their savings. One
commenter, a State securities regulator, identified multiple examples
of abusive sales tactics impacting retirement investors and said more
protections are needed.
In this regard, Morningstar submitted a comment that quantified
potential benefits of the proposal in two areas. First, as a result of
the proposal's coverage of recommendations to plan fiduciaries about
the fund lineups in defined contribution plans, participants in
workplace retirement plans would save over $55 billion in the first 10
years and over $130 billion in the subsequent 10 years, in undiscounted
and nominal dollars, due to reductions in costs associated with
investing through their plans. Second, retirement investors rolling
over retirement funds into fixed indexed annuities would save over
$32.5 billion in the first 10 years and over $32.5 billion in the
subsequent 10 years, in undiscounted and nominal dollars, also due to
decreased pricing spreads.\117\
---------------------------------------------------------------------------

\117\ Available at https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/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 acknowledges
these comments but notes they are outside the scope of this project.
---------------------------------------------------------------------------

Commenters supporting the proposal discussed the need for
application of ERISA fiduciary protections even in light of other
regulators' conduct standards. Some commenters said SEC Regulation Best
Interest had only limited reach in that it applies only to investments
that are securities and some commenters also said it had only limited
requirements for conflict mitigation at the financial institution
level. A commenter also said there are disparities in the degree to
which firms are implementing SEC Regulation Best Interest's
requirements. Commenters referenced a 2023 report by the North American
Securities Administrators Association on SEC Regulation Best Interest
implementation that found that even as firms have updated their
investor profile forms and policies and procedures to focus on
Regulation Best Interest obligations, many broker-dealers continue to
recommend complex products and rely on financial incentives instead of
lower cost, lower risk products.\118\ One commenter said alternative
assets, which they said included for example, precious metals, real
estate, private equity, and debt, may not be subject to standards set
by the SEC and that state laws vary and leave gaps in protections for
investors in these type of investments.
---------------------------------------------------------------------------

\118\ NASAA, Report and Findings of NASAA's Broker-Dealer
Section Committee: National Examination Initiative Phase II(B)
(Sept. 2023) at 2-3, https://www.nasaa.org/wp-content/uploads/2023/08/Reg-BI-Phase-II-B-Report-Formatted-8.29.23.pdf.
---------------------------------------------------------------------------

With respect to the insurance marketplace, several commenters
described significant conflicts of interest associated with large
commissions on some annuity sales, as well as abusive sales practices.
Commenters also noted that the terms of annuity contracts, including
surrender charges, may often be detrimental to retirement investors but
may not be well understood. One commenter said recommendations of
annuities for purchase inside retirement accounts deserve special
scrutiny because the annuities are often marketed based on purported
tax deferral advantages that would not be realized inside an already
tax-preferred retirement account.
Some commenters said these issues are not addressed by the NAIC
Model Regulation, which some described as providing a best interest
standard in name only, when in substance it remains a suitability
standard. One commenter presented a guide developed by the Certified
Financial Planner (CFP) Board comparing the CFP Board's Code and
Standards to the NAIC Model Regulation, which states, among other
things, that the NAIC Model Regulation appears to provide a care
obligation that does not rise to the level of a ``prudent professional
standard.'' The guide further states that the NAIC Model Regulation
does not effectively require the client's interests to come first.\119\
Even though the NAIC Model Regulation's best interest obligation
includes the requirement that the producer shall not place the
producer's or the insurer's financial interest ahead of the consumer's
interest, several commenters observed that none of the component
obligations include a specific requirement for the producer to act in
the best interest of the consumer. In other words, the NAIC Model
Regulation treats the best interest obligation as satisfied if the
producer meets specified component obligations, none of which require
the producer to put the client's interests first.
---------------------------------------------------------------------------

\119\ Available at https://www.cfp.net/-/media/files/cfp-board/standards-and-ethics/compliance-resources/naic-comparison-guide.pdf.
---------------------------------------------------------------------------

Commenters also said the NAIC Model Regulation does not
sufficiently address compensation-related conflicts of interest, noting
that it does not include cash and non-cash compensation within the
definition of a material conflict of interest. As discussed above,
``cash compensation'' that is excluded from the definition of a
material conflict of interest is broadly defined to include ``any
discount, concession, fee, service fee, commission, sales charge, loan,
override, or cash benefit received by a producer in connection with the
recommendation or sale of an annuity from an insurer, intermediary, or
directly from the consumer,'' and ``non-cash compensation'' is also
broadly defined to include ``any form of compensation that is not cash
compensation, including, but not limited to, health insurance, office
rent, office support and retirement benefits.'' \120\ One commenter
expressed the view that an annuity producer that recommends an annuity
because that particular annuity pays a larger commission or will help
the producer meet a sales goal or ensure the producer wins an expensive
trip will meet the best interest standard in the NAIC Model Regulation
so long as the annuity is ``suitable'' for the retirement saver.
---------------------------------------------------------------------------

\120\ NAIC Model Regulation at section 5.B. and J.
---------------------------------------------------------------------------

Another commenter noted that there are abuses in life insurance
recommendations as well, and that the NAIC has not addressed
investment-oriented life insurance policies even

[[Page 32134]]

though regulators receive many thousands of customer complaints about
the policies.
Several commenters responded to arguments that disclosures are
sufficient for financial professionals to avoid conflicts of interest.
The commenters stated that, while disclosures are important components
of financial regulation and provide transparency, they are ineffective
in protecting investors. The commenters noted that the disclosures are
often long and full of technical language. The commenters stated that
studies showed that disclosures cause investors to trust and
increasingly rely on financial professionals, enhancing the ability of
financial professionals to provide information not in the investors'
best interest.
Overall, these commenters suggested that the proposal would benefit
retirement investors by ensuring that investment advice they receive
from trusted advice providers is consistent with ERISA's fiduciary
protections under Title I and Title II.

2. Comments Opposing the Proposal

Some other commenters said the Department should retain the 1975
regulation as the applicable regulatory definition of an investment
advice fiduciary. They said the five parts of the 1975 regulation are
needed to describe a relationship of trust and confidence, consistent
with the Fifth Circuit's Chamber opinion. Some of the commenters
further said that the Department had not provided sufficient evidence
of existing problems that would be solved by the updated investment
advice fiduciary definition.
Commenters also said the proposed rule exceeded the Department's
jurisdiction, for a variety of reasons, including in covering advice to
roll over from a workplace retirement plan to an IRA as advice under
Title I of ERISA. Many commenters said that the proposal suffered the
same legal flaws as the 2016 Final Rule and would be legally vulnerable
under the Chamber opinion. One commenter said that the statutory
language in ERISA section 3(21)(A) and Code section 4975(e)(3) provides
that a person is a fiduciary only ``to the extent'' they ``provide
investment advice for a fee or other compensation, direct or
indirect,'' which indicated there were limits on the breadth of what is
considered ERISA fiduciary investment advice.
Some commenters also said that financial professionals paid by
commission cannot satisfy the ERISA fiduciary duties under Title I
which require, among other things, fiduciaries to discharge their
duties with respect to the plan ``solely in the interests of the
participants and beneficiaries.'' \121\ These commenters said they
understood this standard to require a complete disregard of any
financial interest, which they said is incompatible with the business
of broker-dealers and insurance agents. Some commenters also said the
Department did not have jurisdiction to create a ``best interest''
standard, which they said has no basis in ERISA. Commenters also said
the Department should not rely on ``best interest'' standards of other
regulators to demonstrate trust and confidence required for ERISA
fiduciary status. Some commenters said the SEC in Regulation Best
Interest and the NAIC in its Model Regulation intentionally created
standards that were not fiduciary standards, and the Department should
not override those decisions.
---------------------------------------------------------------------------

\121\ See ERISA section 404, 29 U.S.C. 1104.
---------------------------------------------------------------------------

Many of these commenters also said an updated definition of an
investment advice fiduciary is unnecessary in light of the conduct
standards in SEC Regulation Best Interest and the adoption by many
States of the NAIC Model Regulation. Commenters described these
regulatory actions as establishing robust, effective, and workable best
interest standards while preserving the ability of retirement investors
to work with the financial professional of their choosing and to retain
choice as to how they pay for financial services and products.
Some commenters said the proposal's preamble discussion of the NAIC
Model Regulation reflected misunderstanding by the Department. They
said the NAIC Model Regulation sets forth a clear best interest
standard despite not restating the ``best interest'' requirement in the
component obligations. They also said that the NAIC Model Regulation
did require mitigation of compensation-related conflicts of interest in
the area of sales contests, sales quotas, bonuses, and non-cash
compensation that are based on the sales of specific annuities within a
limited period of time, and the decision to exclude compensation from
the definition of material conflicts of interest demonstrated a
conscious choice that the best way to address conflicts is through
disclosure.\122\ Commenters also identified other types of State
insurance laws that provide protection to retirement savers, such as
regulations governing insurance advertising. An insurance commissioner
commenter said the Department's proposal would displace the
requirements of the NAIC Model Regulation as adopted by the States.
---------------------------------------------------------------------------

\122\ See NAIC Model Regulation at section 6.C.(2)(h).
---------------------------------------------------------------------------

In sum, these commenters generally urged the Department to withdraw
the proposal and focus its resources on other priorities.

3. Comments About Preserving Access to Investment Advice and Products
in the Retail Market

Many commenters addressed the impact of the proposal on access to
investment advice and products in the retail market. Some commenters
believed that the rule would lead to advice providers imposing account
minimums or raising their fees. Commenters also said that imposing
ERISA fiduciary protections on advice and recommendations to retirement
investors would lead to a decrease in commission-based arrangements and
related access to certain investment products. They said this would be
the case because status as an investment advice fiduciary would expose
financial services providers to additional compliance costs and
litigation risk. Commenters further said that the proposal was
insufficiently specific about when ERISA fiduciary status would apply,
and uncertainty would result in some providers taking a conservative
approach and discontinuing serving retirement investors. Commenters
said commission-based arrangements provide a valuable source for
investment advice and information, and that a reduction in such
arrangements would negatively impact retirement investors who may not
be best suited for a fee-based investment advice arrangement.
A number of commenters said the proposal would have a negative
impact on access to annuities, which are generally sold on commission.
These commenters described annuities as an important option for
retirement investors seeking a guaranteed lifetime income stream as
part of their retirement plan. Some of these commenters said the
Department's proposal failed to recognize the value of these products
and was inconsistent with congressional intent to promote lifetime
income options, as evidenced by recent pension legislation in the
SECURE Act \123\ and the SECURE 2.0 Act.\124\ Commenters specifically
mentioned such features as protection

[[Page 32135]]

against volatility, longevity and inflation risk through guarantees.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

In this regard, some commenters said the Department's proposal
would impose ERISA fiduciary duties on financial professionals who are
traditionally considered salespeople. The commenters said that when the
financial professional is paid on commission it should be clear to the
retirement investor that the professional is engaging in sales
activity, as opposed to providing advice. Commenters said that under
the Fifth Circuit's Chamber opinion, salespersons are generally not
considered to have a relationship of trust and confidence with their
customers. One commenter said: ``the fact that a broker-dealer or
insurance agent acts in a manner that is trustworthy and provides
guidance and recommendations in the investor's best interest does not
alter the sales relationship and does not implicate or confer fiduciary
status.''
Another commenter discussed the proposal in the context of
alternative investments, where the commenter said commissions are
relatively large. The commenter said applying ERISA's reasonable
compensation standard and the PTEs' conduct standards in this context
would likely chill willingness to recommend investment products with
higher-than-average commissions, including alternative investments that
the commenter said provide diversification, income, and other important
portfolio elements. They said that although the SEC in Regulation Best
Interest does require a focus on costs associated with an investment,
it does not employ a distinct inquiry into the broker-dealer's
compensation analogous to ERISA's reasonable compensation standard.
Therefore, they did not believe that the Department's proposal was
consistent with the SEC's approach in Regulation Best Interest or
workable for broker-dealers.
Other commenters generally urged the Department to be skeptical of
industry predictions of loss of access to advice and services. They
believed providers would remain available to serve retirement investors
irrespective of account balance size. They also said they were not
aware of any decrease in access to advice and products following the
recent adoption of other conduct standards including Regulation Best
Interest. Rather, they said, the experience with Regulation Best
Interest shows that financial professionals paid on commission can
comply with an explicit best interest standard that requires conflict
mitigation. A commenter also pointed to the fact that financial
professionals paid on commission are among the CFP professionals who
have adopted the CFP Board fiduciary duty.
These commenters disagreed that retirement investors are well aware
when they are receiving a sales pitch. They said retirement investors
generally do not understand how financial professionals are paid or the
differences in the regulatory requirements applicable to broker-
dealers, investment advisers, and insurance agents.
A number of these commenters also said commission-based financial
professionals commonly hold themselves out as trusted advice providers.
Commenters said that marketing slogans and titles such as ``financial
advisor,'' ``financial consultant,'' and ``wealth manager'' are
commonly and deliberately used to establish a sense of trust and
confidence. One commenter cited several examples of marketing
strategies employed in the insurance industry. One such example
described a ``Trusted Advisor Success Training Workshop'' showing
insurance agents how they ``can have endless streams of new, repeat,
and referral business'' by ``mak[ing] the move from a salesperson to a
`Trusted Advisor!'''
One commenter described a study that found that 25 of the largest
insurance companies and broker-dealers substantively market themselves
as offering advice services and using advice titles, even as they
continued to rely on the regulatory standards that apply to
salespersons.\125\ Another commenter provided examples, such as the
following statement they said was on the annuities page of an insurance
company: ``by working with a trusted financial professional, you can
discuss your unique circumstances and how best to prepare for the
challenges that may lie ahead.'' These commenters did not agree that
commission-based financial professionals should categorically be
excluded as investment advice fiduciaries or that such a categorical
exclusion was compelled by the Fifth Circuit's Chamber decision.
---------------------------------------------------------------------------

\125\ The commenter cited the following press release relating
to the study: ``Review of 25 Major Brokerage Firms & Insurance
Companies Find All Posing as Fiduciaries, Misleading Consumers,''
Consumer Federation of America press release, Jan. 18, 2017, https://consumerfed.org/press_release/review-25-major-brokerage-firms-insurance-companies-find-posing-fiduciaries-misleading-consumers.
---------------------------------------------------------------------------

A number of comments from financial professionals paid on
commission also indicated they did not think of themselves as
salespeople. One financial services provider who testified at the
Department's public hearing on the proposal and said that most of his
customers pay by commission, stated he was not a salesperson and agreed
that he did have a relationship of trust and confidence with his
customers.\126\ He described himself as ``[a]n advisor and somebody who
helps and serves my clients, that's my highest ethic and creed. . . . I
believe those individuals who are called to serve others gravitate
towards professions like ours.'' \127\
---------------------------------------------------------------------------

\126\ Testimony of Bryon Holz, National Association of Insurance
and Financial Advisors, Transcript of the Public Hearing on the
Retirement Security Rule: Definition of an Investment Advice
Fiduciary, December 12, 2023, at 176, 180, available at https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/hearing-transcript-day-1.pdf.
\127\ Id.
---------------------------------------------------------------------------

The witness represented the National Association of Insurance and
Financial Advisors (NAIFA), a large association representing the
interests of insurance professionals, and said ``NAIFA members are Main
Street advisors who primarily serve and maintain longstanding
relationships with individuals, families and small businesses in their
communities.'' \128\ In describing the process for deciding whether to
recommend an annuity to someone and determine what the right annuity
is, the witness said: ``basically we have a long-term relationship
where I get to know the client, get to know their needs, their
objectives, their risk tolerance and try to figure out what the best
products and services are to meet those needs.'' \129\ Other comments
similarly indicated that some financial professionals paid on
commission nevertheless view themselves as trusted advisers.\130\
---------------------------------------------------------------------------

\128\ Id.
\129\ Id. at 174.
\130\ See e.g., petition 4, with 3059 submitters (``Having a
relationship with a trusted financial advisor helps people save more
for retirement. I provide my clients with comprehensive financial
advice and as an independent financial advisor, I can recommend
products that are in their best interest. Currently, clients can
choose how to pay for financial advice by working with financial
advisors whose business model aligns with their goals. . . .
[C]ommissions are an important way that advisors are able to serve
those who may not otherwise be able to afford to work with an
advisor because they have less investable assets or because a
specific investment strategy with commissions is the most
economically available option.''), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/petition-004.pdf.
---------------------------------------------------------------------------

Other commenters said that the Department's proposal would lead to
a reduction in sales recommendations in the institutional market and
also in the provision of educational information. These comments are
discussed in Section E of the preamble. Access to advice in the retail
market is further

[[Page 32136]]

discussed in section 7 of the Regulatory Impact Analysis.
4. The Department's Decision to Issue the Final Rule
After careful consideration of the comments discussed in this
section, the Department has determined to issue a final rule updating
the regulatory definition of an investment advice fiduciary, with
changes reflecting input from the commenters. This decision reflects
the continued view that applying ERISA fiduciary protections under
Title I and Title II to trusted advice to retirement investors about
their retirement accounts is necessary and appropriate to protect the
retirement investors from conflicts of interest.
The Department's Jurisdiction
To begin with, as some commenters noted, when Congress enacted
ERISA, it chose to impose a uniquely protective regime on the
management and oversight of plan assets. The law's aim was to protect
the interests of plan participants and beneficiaries by imposing
especially high standards on those who exercise functional authority
over plan investments, including rendering investment advice for a
fee.\131\ As many courts have noted, ERISA's obligations are the
``highest known to the law.'' \132\ Thus, the Department has not
deferred completely to the Federal securities laws and State insurance
laws, as some commenters advocated, because such deference would not be
consistent with congressional intent or ERISA's purposes.
---------------------------------------------------------------------------

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

Under Title I of ERISA, the Department has express authority to
issue regulations defining terms in Title I and to grant administrative
exemptions from the prohibited transactions provisions. Pursuant to the
President's Reorganization Plan No. 4 of 1978,\133\ which Congress
ratified in 1984,\134\ the Department's authority was expanded to
include authority to issue regulations, rulings, and opinions on the
definition of a fiduciary with respect to Title II plans under the Code
(including IRAs) and to grant administrative prohibited transaction
exemptions applicable to them.\135\ Thus, the Department has clear
authority to promulgate the regulatory definition of a fiduciary under
both Title I and Title II of ERISA, and the Department has taken care
in this final rule to honor the text and purposes of Title I and Title
II of ERISA.
---------------------------------------------------------------------------

\133\ 5 U.S.C. App. 752 (2018).
\134\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\135\ Sec. 102, 5 U.S.C. App. 752 (2018).
---------------------------------------------------------------------------

The final rule is consistent with the express text of the statutory
definition and will better protect the interests of retirement
investors as compared to the 1975 regulation. It comports with the
broad language and protective purposes of the statute, while at the
same time limiting the treatment of recommendations as ERISA fiduciary
advice to those objective circumstances in which a retirement investor
would reasonably believe that they can rely upon the advice as rendered
by a financial professional who is acting in the investor's best
interest and on their behalf.
In today's market, the 1975 regulation's five-part test is
underinclusive in assigning fiduciary status as it fails to capture
many circumstances in which an investor would reasonably expect that
they can place their trust and confidence in the advice provider. As
noted above, the Department has become concerned that the 1975
regulation's regular basis test has served to defeat objective
understandings of the nature of the professional relationship and the
reliability of the advice as based on the investor's best interest. The
proposal noted that even a discrete instance of advice can be of
critical importance to the plan. As another example, under the 1975
regulation's ``regular basis'' requirement, which is not found in the
text of the statute, a financial professional could provide
recommendations on a regular basis for many years to an investor
regarding the investor's non-retirement accounts and yet still not be
considered an investment advice fiduciary with respect to a
recommendation to roll over all their retirement savings from the
investor's workplace retirement plan to an IRA if that is the first
instance of advice with respect to that plan account.
Therefore, the Department does not believe that the 1975
regulation's five-part test is the only test that can properly define
an investment advice fiduciary under the statute, and the Department
does not believe its authority to revisit the regulatory definition of
an investment advice fiduciary and depart from the 1975 five-part test
is foreclosed by the Chamber opinion. The discrete components of the
five-part test are not found in the text of the statute, and commenters
did not identify--and the Department's research did not uncover--any
common law cases predating enactment of ERISA that limited the
application of fiduciary status and obligations to those persons that
meet all five of the requirements created and imposed by the 1975
regulation. To the contrary, the Department notes that multiple cases
discuss how ERISA's statutory definition of ``fiduciary'' is
broad,\136\ with one such case indicating that the definition of
``fiduciary'' under ERISA is broader than the more restrictive approach
the Department articulated through the 1975 five-part test.\137\
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\136\ See Eaves v. Penn, 587 F.2d 453, 458 (10th Cir. 1978);
Farm King Supply, Inc. Integrated Profit Sharing Plan & Tr. v.
Edward D. Jones & Co., 884 F.2d 288, 293 (7th Cir. 1989); see also
Thomas, Head & Greisen Emps. Tr. v. Buster, 24 F.3d 1114, 1117 (9th
Cir. 1994) (``[T]he definition of fiduciary under ERISA should be
liberally construed.'' (citing Consolidated Beef Indus. Inc. v. New
York Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991), cert. denied,
503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry Thrailkill,
Fiduciaries Under ERISA: A Narrow Path to Tread, 30 Vanderbilt L.
Rev. 1, 4-5 (1977) (referring to the ``broadness of the [statutory]
definition'' of ``fiduciary'' under ERISA, such that the definition
could cover ``insurance salesmen who recommend the purchase of
certain types of insurance and receive a commission on the sale of
such insurance'' and ``stock brokers or dealers who recommend
certain securities and then participate in the acquisition or
disposition of securities and receive a commission for their
services'').
\137\ See Farm King, 884 F.2d at 293 (discussing ``evidence of
the wide sweep given to the meaning of `fiduciary' under ERISA'' in
relation to the narrower definition codified in the 1975 test).
---------------------------------------------------------------------------

The Department also does not agree with a commenter that said that
the proposal would render the ``to the extent'' language in the statute
a nullity.\138\ Under ERISA's functional test of fiduciary status, as
the courts have repeatedly recognized, a person is a fiduciary to the
extent the person engages in specified activities, and only

[[Page 32137]]

to that extent.\139\ Under both the proposed rule and the final rule,
therefore, a person renders fiduciary advice only to the extent they
meet the regulatory definition with respect to the particular
communication at issue. A person may be a fiduciary for purposes of one
advice transaction and not another, and the person must meet the
specific requirements of the final rule to be treated as a fiduciary
with respect to any given transaction. To the extent a person does not
meet the final rule's requirements (e.g., by not making a
recommendation, receiving a fee, providing individualized advice, or
purporting to act in the investor's best interest), they are not a
fiduciary with respect to that recommendation. The final rule fully
adopts the statute's functional and transactional approach to the
determination of fiduciary status.
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\138\ ERISA section 3(21)(A)(ii) provides: ``a person is a
fiduciary with respect to a plan to the extent . . . (ii) [t]he
[person] renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of
such plan, or has any authority or responsibility to do so . . . .''
\139\ See, e.g., Mertens v. Hewitt Associates, 508 U.S. 248, 264
(1993); John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank,
510 U.S. 86, 98 (1993).
---------------------------------------------------------------------------

The final rule also does not base fiduciary status on firms' or
financial professionals' status under other laws, as some commenters
have asserted. Instead, the final rule is focused on defining those
circumstances in which the retirement investor has a reasonable
expectation that the recommendation reflects a professional or expert
judgment offered on their behalf and in their interest. In the
circumstances specified, a retirement investor would be entitled to
treat their relationship with the person making the recommendation as
one of trust and confidence. To the extent that a financial
professional satisfies the conditions, in part, based on compliance
with other regulators' conduct standards, that would merely be a
consequence of independent decisions made by other regulators. The
final rule does not override those regulators' decisions as to how to
characterize their conduct standards, require them to take any
particular approach to oversight of investment recommendations, or pin
fiduciary status on anything other than a reasonable understanding of
the nature of the relationship between the persons giving and receiving
the advice. The Department's regulation is based on its unique
authority to define a fiduciary for purposes of Title I and Title II of
ERISA, establish a uniform definition for all persons giving investment
advice to retirement investors under Title I and Title II of ERISA, and
fulfill the statute's investor-protective purposes in accordance with
the text of the statute.
Moreover, commission-based financial professionals are fully able
to satisfy ERISA's fiduciary standard of loyalty in Title I. The
Department has long interpreted the duty of loyalty, as set forth in
section 404(a)(1)(A) of ERISA (a fiduciary must discharge their duties
with respect to the plan ``solely in the interests of the participants
and beneficiaries'') as establishing a standard that prohibits a
fiduciary from ``subordinating the interests of participants and
beneficiaries in their retirement income to unrelated objectives.''
\140\ This standard properly applies section 404(a)(1)(A)'s duty of
loyalty in the context of advice arrangements. ERISA further permits
fiduciaries to receive reasonable compensation--including commission-
based compensation--for their services.\141\
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\140\ See, e.g., Advisory Opinion 2008-05A (June 27, 2008);
Letter to Harold G. Korbee (Apr. 22, 1981).
\141\ ERISA section 408(c)(2), 29 U.S.C. 1108(2); Code section
4975(d)(10).
---------------------------------------------------------------------------

Indeed, the statute recognizes the impossibility of avoiding all
fiduciary conflicts of interest by giving the Department authority to
grant exemptions from the prohibited transaction rules. The mere
existence of a conflict is insufficient to defeat fiduciary status or
to establish a violation of the prohibited transaction rules. Instead,
the conflict of interest must be managed in accordance with a statutory
exemption or administrative exemption granted by the Department. This
does not prevent commission-based compensation arrangements, as some
commenters have asserted, so long as the advice provider does not
subordinate the interests of the retirement investor to their own
financial interests and does not charge more than ``reasonable
compensation,'' as expressly authorized by the statute.\142\ Indeed, in
many instances, such as those involving advice on ``buy and hold''
strategies, a commission-based model may be more appropriate for the
investor, and a prudent fiduciary may recommend the use of a
commission-based structure, rather than advise the investor to enter
into an arrangement that requires the payment of ongoing fees without a
commensurate need for ongoing advice. Nothing in the text of the
statute, the text of the 1975 regulation, or previous guidance draws a
distinction between commission-based compensation and other forms of
compensation in determining whether a person is a fiduciary when making
recommendations for direct or indirect compensation.
---------------------------------------------------------------------------

\142\ ERISA section 408(b)(2); 29 U.S.C. 1108(b)(2); Code
section 4975(d)(2).
---------------------------------------------------------------------------

One commenter expressed concern that the rule could reduce access
to advice on alternative investments because of the relatively large
commissions paid in connection with alternative investments. The
commenter said the reasonable compensation requirement did not have an
analog in Regulation Best Interest and also would be unworkable for
broker-dealers. However, the obligation to pay no more than reasonable
compensation to service providers has been long recognized under Title
I and Title II of ERISA. The statutory exemptions in ERISA section
408(b)(2) and Code section 4975(d)(2) expressly require services
arrangements involving plans and IRAs to result in no more than
reasonable compensation to the service provider. Financial institutions
and investment professionals--when acting as service providers to plans
or IRAs--have long been subject to this requirement, regardless of
their fiduciary status. The reasonable compensation standard requires
that compensation not be excessive, as measured by the market value of
the particular services, rights, and benefits the financial institution
and investment professional are delivering to the retirement investor.
To the extent an investment advice fiduciary's receipt of
compensation would constitute a self-dealing type prohibited
transaction under ERISA section 406(b) and Code section 4975(c)(1)(E)
or (F), conditional relief for investment advice fiduciaries to receive
compensation that varies based on their investment advice is provided
pursuant to amended PTE 2020-02 and amended PTE 84-24. One such
condition in these PTEs is adherence to a loyalty obligation that the
Department has stated is consistent with the ``sole interest'' standard
in ERISA section 404.\143\ The use of the standard in the PTEs is an
appropriate exercise of the Department's exemptive authority under
ERISA section 408(a) and the Reorganization Plan No. 4 of 1978 to
provide an exemption that is protective of the interests of retirement
investors, not an improper conflation of the two standards, as
suggested by some commenters. Based on this discussion, the Department
disagrees with the commenter who said the proposal would be unworkable
for broker-dealers.\144\
---------------------------------------------------------------------------

\143\ Improving Investment Advice for Workers & Retirees, 85 FR
82798, 82823 (Dec. 18, 2020).
\144\ The Department also notes that there are compensation
requirements applicable to broker-dealers, see e.g., FINRA rule 2121
(fair prices and commissions).

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[[Page 32138]]

Some commenters also sought to draw a bright line distinction
between recommendations made in a sales capacity and those made in a
fiduciary capacity, asserting that commission-based recommendations are
properly viewed as mere sales pitches that should not lead to ERISA
fiduciary status. This approach, however, is neither supported by the
text of the statute nor the Department's consistent views starting in
1975 that advice can be compensated through commissions.\145\ The text
of the statute does not draw a distinction between commissions and
other fee-based forms of compensation, but rather broadly refers to
``advice for a fee or other compensation, direct or indirect,'' which
the Department has consistently recognized includes commission-based
advice. Accordingly, the final rule properly focuses on the nature of
the relationship between the parties, rather than the specific mode of
compensation. Whether a firm or financial professional has held
themselves out as providing the sort of recommendation that may rightly
be relied upon as a fiduciary recommendation is a function of the test
set forth in the final rule, which requires compensation, but does not
draw a bright line between commissions and fee-based compensation. In
those circumstances where the final rule's definition is satisfied, the
firm or investment professional is doing much more than merely
executing a sale. They are offering a professional recommendation that
is purportedly based on the investor's best interest, and that
recommendation is central to the relationship and a key component of
the services offered to the investor.
---------------------------------------------------------------------------

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

In this connection, however, it is important to note that neither
the proposed rule nor the final rule assigns fiduciary status to a
party who merely engages in a sales transaction with a retirement
investor. Under the express terms of paragraph (d) of the final rule,
merely executing a sale does not give rise to fiduciary status.
Moreover, even if one makes a recommendation in connection with a
commission-based transaction, that recommendation will not amount to
fiduciary advice unless the recommendation meets the specific
conditions set forth in the final rule, all of which are aimed at
ensuring that the advice goes beyond a mere ``sales pitch,'' and
instead reflects the sort of relationship of trust and confidence that
should be afforded fiduciary status and protection. To that end, and in
response to comments, the Department narrowed the contexts that give
rise to fiduciary status, and included a new paragraph confirming that
mere sales recommendations devoid of the two covered contexts will not
result in ERISA fiduciary status and that investment information or
education, without an investment recommendation, will also not result
in ERISA fiduciary status.
Finally, some commenters said that the Chamber opinion indicated
that the Department's authority to regulate conduct in the financial
services industry has been limited by the Dodd-Frank Act. The
commenters said that under Dodd-Frank, Congress had authorized the SEC,
and not the Department, ``to promulgate enhanced, uniform standards of
conduct for broker-dealers and investment advisers who render
`personalized investment advice about securities to a retail customer.'
''
The Department's well-settled authority under ERISA to regulate
investment advice rendered by fiduciaries to retirement investors in
the context of certain annuity sales was not impaired by the Dodd-Frank
legislation. Rather, section 913 of the Dodd-Frank Act directed the SEC
to study the effectiveness of the rules applicable to investment advice
respecting securities by entities subject to SEC regulation ``and other
Federal and State legal or regulatory standards.'' The reference to
other standards demonstrates Congress' clear awareness that there are
overlapping Federal regulatory schemes. Moreover, this rulemaking is
closely aligned with the SEC's standards under both the Advisers Act
and under Regulation Best Interest, which was adopted subsequent to the
Chamber opinion and is rooted in fiduciary principles.\146\
---------------------------------------------------------------------------

\146\ See Regulation Best Interest release, 84 FR 33318, 33330
(July 12, 2019) (noting that Regulation Best Interest ``draws from
key fiduciary principles underlying fiduciary obligations'' and that
the ``key elements of the standard of conduct that applies to
broker-dealers under Regulation Best Interest will be substantially
similar to key elements of the standard of conduct that applies to
investment advisers pursuant to their fiduciary duty under the
Advisers Act.''); see also, SEC Staff Bulletin: Standards of Conduct
for Broker-Dealers and Investment Advisers Care Obligation (``Both
[Regulation Best Interest] for broker-dealers and the [Advisers Act]
fiduciary standard for investment advisers are drawn from key
fiduciary principles that include an obligation to act in the retail
investor's best interest and not to place their own interests ahead
of the investor's interest.''), https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.
---------------------------------------------------------------------------

In addition, some commenters posited that section 989J of Dodd-
Frank limited regulation of fixed indexed annuities to States (provided
certain criteria are met). In making this assertion, commenters cited
language in the Chamber decision to the effect that ``[s]ection 989J .
. . provides that `fixed indexed annuities sold in states that adopted
the [NAIC's] enhanced model suitability regulations, or companies
following such regulations, shall be treated as exempt securities not
subject to federal regulation.' '' \147\ The quoted language, however,
was taken from an appellate brief, not section 989J. The statutory
language simply states that ``[t]he Commission [SEC] shall treat as
exempt'' such annuities from regulation as securities. By its express
terms, section 989J restricts regulation only by the SEC under the
securities laws.\148\ It does not address or limit the Department of
Labor's separate authority under ERISA or its separate obligations with
respect to retirement plans and IRAs. In accordance with its authority
under ERISA, the Department has determined that it is appropriate to
include investment advice regarding plan and IRA investments in fixed
indexed annuities within this scope of this rule.
---------------------------------------------------------------------------

\147\ 885 F.3d at 385 (citation omitted). The decision
incorrectly attributes the internally quoted language to the text of
Dodd-Frank. Id. This language is actually from an appellate brief by
the Indexed Annuity Leadership Council (IALC), one of the plaintiffs
that challenged the 2016 Rulemaking. Brief of Plaintiff-Appellant,
Chamber of Com. of United States of Am. v. U.S. Dep't of Lab., 885
F.3d 360 (5th Cir. 2018) (No. 17-10238), 2018 WL 3301737, at *8. The
statutory text itself provides no basis for the broad conclusion
that fixed indexed annuities sold in a State that follows the NAIC's
model suitability (or successor) regulations, among other criteria,
are exempt from Federal regulation.
\148\ 15 U.S.C. 77c Note (emphasis added).
---------------------------------------------------------------------------

Need for an Updated Definition of an Investment Advice Fiduciary
The 1975 regulation makes it all too easy for financial
professionals and firms to hold themselves out as trusted advisers
acting in the individual investor's best interest and based on their
individual circumstances when, in fact, they have no obligation to act
in

[[Page 32139]]

the investor's best interest or otherwise adhere to the fiduciary
standards under Title I and Title II of ERISA. While the actions of
other regulators, particularly the SEC's adoption of Regulation Best
Interest, have partly addressed this concern, significant gaps remain,
and the current patchwork regulatory structure is neither uniform nor
sufficiently protective of retirement investors. As discussed in
greater detail in the Regulatory Impact Analysis, the Department has
determined that the final rule will provide additional benefits and
needed protections for retirement investors, even in light of other
regulators' recently enhanced conduct standards.\149\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

For example, commenters did not dispute the fact that certain
recommendations by broker-dealers to retirement investors are not
covered by SEC Regulation Best Interest, including recommendations to
plan fiduciaries such as the fiduciaries of small employer plans who
need assistance in constructing the lineup on a 401(k) plan menu.\150\
Several commenters expressed strong support for applying ERISA
fiduciary protections in this context, with Morningstar quantifying
potential benefits of the proposal's coverage of recommendations to
plan fiduciaries on the investment options in defined contribution
plans as saving participants over $55 billion in the next 10 years in
costs associated with investing through their plans. Other investments
that may not be subject to the Federal securities law include: real
estate, fixed indexed annuities, certain certificates of deposit and
other bank products, commodities, and precious metals. Furthermore,
there are a number of persons who provide investment advice services
that are neither subject to the SEC's Regulation Best Interest nor to
the fiduciary obligations in the Advisers Act. Additionally, some
commenters indicated that are disparities in the degree to which firms
have implemented Regulation Best Interest. The Department expects the
addition of ERISA remedies and the Department's enforcement resources
to enhance protection of retirement investors in Title I plans, and to
better ensure that advice providers compete on a level playing field
where recommendations are made pursuant to a common best interest
standard.
---------------------------------------------------------------------------

\150\ One commenter noted that other securities law protections,
such as those under FINRA rules, would be applicable to broker-
dealers making recommendations to plan sponsors. However, the
commenter suggested that the protections lack a duty of loyalty of
comparable rigor to that in PTE 2020-02.
---------------------------------------------------------------------------

Applying ERISA fiduciary protections to the recommendations covered
by the rule will also result in increased protections in the insurance
market, even in those States that have adopted the 2020 revisions to
the NAIC Model Regulation. For example, commenters discussed
significant conflicts of interest associated with large commissions on
annuity sales, as well as abusive sales practices. Conflicted,
imprudent, and disloyal advice with respect to such annuity sales can
result in large investor losses. The dangers are compounded by the
complexity of the products, which makes sound advice critical.
For example, recommendations of fixed indexed annuities are
generally not covered by Regulation Best Interest, but typically are
complex products that depend upon careful and expert assessment of
myriad contract and investment features. Between 2005 and 2022, the
number of indexes available in the market grew from a dozen to at least
150. Many of these indexes are hybrids, including a mix of one or more
indexes, as well as a cash or bond component. More than 60 percent of
premium allocations for new fixed indexed annuity sales in mid-2022
involved hybrid designs. In addition, the determination of the right
annuity requires careful consideration of the method by which the index
is credited to the contract's value, charges associated with the
contract, potential surrender charges, and any limiting factors on the
crediting (such as cap rates, participation rates, or spread). Given
the complexity of the products, it is very easy for investors to
purchase products that have very different risks and benefits than they
thought they were purchasing, and that have considerably more downside
than they expected. For all these reasons, fixed indexed annuities have
been the subject of various regulatory alerts, warning investors of the
dangers associated with the products.\151\ Sound advice is critical. In
its comment, Morningstar estimates that the Department's proposal would
increase retirement investors' savings with respect to fixed indexed
annuities by approximately $32.5 billion over the next ten years.
---------------------------------------------------------------------------

\151\ See, e.g., SEC Office of Investor Education and Advocacy
Updated Investor Bulletin: Indexed Annuities (July 31, 2020),
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=.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\152\ The exclusion of commission payments and other
compensation as well as non-cash compensation from the definition of
a material conflict of interest is in direct contrast to the SEC's
approach in Regulation Best Interest. See Regulation Best Interest
release, 84 FR 33318, 33319 (July 12, 2019)(``Like many principal-
agent relationships--including the investment adviser-client
relationship--the relationship between a broker-dealer and a
customer has inherent conflicts of interest, including those
resulting from a transaction-based (e.g., commission) compensation
structure and other broker-dealer compensation.'') see also Staff
Bulletin: Standards of Conduct for Broker-Dealers and Investment
Advisers Conflicts of Interest which specifically identifies
commissions as an example of a common source of a conflict of
interest, available at https://www.sec.gov/tm/iabd-staff-bulletin-
conflicts-interest.
\153\ NAIC Model Regulation at section 6.C.(2)(h).
---------------------------------------------------------------------------

In particular, the Department is concerned about the NAIC Model
Regulation's definition of ``material conflicts of interest'' which
must be identified and avoided or reasonably managed and disclosed and
which excludes all ``cash compensation'' and ``non-cash compensation.''
As a result, the NAIC Model Regulation excludes ``any discount,
concession, fee, service fee, commission, sales charge, loan, override,
or cash benefit received by a producer in connection with the
recommendation or sale of an annuity from an insurer, intermediary, or

[[Page 32140]]

directly from the consumer,'' as well as ``any form of compensation
that is not cash compensation'' despite their obvious potential to
drive recommendations that favor the financial professional's own
financial interests at the expense of the investor's interests. \154\
---------------------------------------------------------------------------

\154\ NAIC Model Regulation at section 5.B. and J.
---------------------------------------------------------------------------

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 resulting from the firm's or its
financial professionals' sales or offer of proprietary products or
services, or products or services of affiliates.\155\
---------------------------------------------------------------------------

\155\ SEC Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Conflicts of Interest, https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

The Department also notes that the State of New York took a
different approach than the NAIC Model Regulation in its NY Insurance
Regulation 187. Under the New York regulation, ``[o]nly the interests
of the consumer shall be considered in making the recommendation. The
producer's receipt of compensation or other incentives permitted by the
Insurance Law and the Insurance Regulations is permitted by this
requirement provided that the amount of the compensation or the receipt
of an incentive does not influence the recommendation.'' (Emphasis
added.)
The NAIC Model Regulation also specifically disclaims creating
fiduciary obligations and differs in significant respects from the
protective standards applicable to broker-dealers and investment
advisers under Regulation Best Interest and the Advisers Act,
respectively, and this final rule. For example, in addition to
disregarding compensation as a source of material conflicts of
interest, the specific care, disclosure, conflict of interest, and
documentation requirements do not expressly incorporate the ``best
interest'' obligation not to put the producer's or insurer's interests
before the customer's interests, even though compliance with these
component obligations is treated as meeting the best interest standard.
Instead, the core conduct standard of care includes a requirement to
``have a reasonable basis to believe the recommended option effectively
addresses the consumer's financial situation, insurance needs, and
financial objectives.'' Additionally, the obligation to comply with the
``best interest'' standard is limited to the individual producer, as
opposed to the insurer responsible for supervising the producer. In
contrast, the standards in the amended PTEs mirror ERISA section 404's
standards of prudence and loyalty, and provide that the advice must:
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.''
---------------------------------------------------------------------------

\156\ See generally, Regulation Best Interest release, 84 FR
33318 (July 12, 2019); SEC Investment Adviser Interpretation, 84 FR
33669 (July 12, 2019).
---------------------------------------------------------------------------

In response to commenters who expressed concern that the
Department's rule would improperly displace State regulation in the
annuities market, it bears repeating that in enacting ERISA, Congress
imposed a uniquely protective regime on tax-preferred retirement
investments. The Department's final rule, which covers compensated
retirement recommendations under conditions where it is reasonable to
place trust and confidence in the advice, falls well within ERISA's
broad fiduciary definition, even if it is more protective of federally-
protected retirement investments than State insurance regulations. It
is also important to note the interaction between the NAIC Model
Regulation and the fiduciary protections under Title I and Title II of
ERISA is explicitly recognized in the NAIC Model Regulation's safe
harbor for the recommendations and sales of annuities in compliance
with comparable standards, including those applicable to fiduciaries
under Title I and Title II of ERISA.\157\
---------------------------------------------------------------------------

\157\ NAIC Model Regulation at section 6.E.
---------------------------------------------------------------------------

Although some commenters maintained the Department misunderstands
the NAIC Model Regulation, the Department's analysis is based on the
terms of the Model

[[Page 32141]]

Regulation and is consistent with that of other commenters, including
the CFP Board in their publication discussed above. There can be no
misunderstanding with respect to the fact that the NAIC Model
Regulation clearly and unambiguously excludes cash and non-cash
compensation from the definition of a material conflict of
interest.\158\ Because of this exclusion, the NAIC Model Regulation
does not provide that producers must identify and avoid or reasonably
manage material conflicts of interest arising from cash and non-cash
compensation. This leaves disclosure as the sole method of addressing
such conflicts other than the prohibition of sales contests, sales
quotas, bonuses, and non-cash compensation that are based on the sales
of specific annuities within a limited period of time, which are
prohibited. The Department's PTEs' more stringent requirements will
require insurance market participants not only to disclose but also to
more broadly mitigate conflicts of interest associated with commissions
and other cash and non-cash compensation to insurance producers
providing recommendations to retirement investors, resulting in
enhanced protections to consumers.\159\
---------------------------------------------------------------------------

\158\ NAIC Model Regulation at section 5.I.(2).
\159\ One commenter provided a summary of the differences
between the NAIC Model Regulation and ERISA's fiduciary
responsibilities. These differences highlight the additional
protection under ERISA in the insurance marketplace. See Federation
of Americans for Consumer Choice 6 (``The differences between NAIC
model regulation best interest and ERISA fiduciary duties include:
(i) ERISA has a duty of loyalty to act solely in the interest of the
client different from the NAIC model regulation requirement for
agents not to put their interests ahead of client interests, (ii)
ERISA contains a prudence requirement not considered applicable to
insurance producers, (iii) the NAIC model regulation establishes
four specified obligations deemed to satisfy the best interest
standard consisting of care, disclosure, conflict of interest, and
documentation, all of which comport with the sales function of an
agent, (iv) the NAIC model regulation requires neither ongoing
monitoring nor diversification of assets which may need to be
considered by ERISA fiduciaries, (v) the NAIC model regulation does
not define conflicts of interest as broadly as ERISA instead relying
on disclosure befitting insurance sales practices, (vi) the NAIC
model regulation contains no reasonable compensation restrictions
but limits certain forms of incentive compensation, and (vii) the
NAIC model regulation does not expose agents to common law fiduciary
liabilities, DOL oversight, or potential private right of action
under ERISA.''), https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/00345.pdf.
---------------------------------------------------------------------------

The Chamber Opinion
Many commenters said the proposed regulation was essentially a re-
proposal of the 2016 Rulemaking and had the same legal vulnerabilities.
They generally said that, in Chamber, the court had approved the 1975
regulation's five-part test as defining a relationship of trust and
confidence and they objected to any revision of the five-part test as
inconsistent with both the statutory definition and the Fifth Circuit's
opinion. The Department disagrees and notes the various differences
between the 2016 Rulemaking and this final rule. In writing the
proposal and this final rule, the Department has been careful to craft
a definition that is consistent with both the statutory text and with
the Fifth Circuit's focus on relationships of trust and confidence. The
Department's authority to revisit the regulatory definition of an
investment advice fiduciary and depart from the 1975 five-part test is
not foreclosed by the Chamber opinion. In this regard, commenters did
not identify for the Department, and the Department's research did not
uncover, any common-law cases predating enactment of ERISA that limited
the application of fiduciary status and obligations to those persons
that meet all five of the requirements created and imposed by the 1975
regulation. Other courts that considered the Department's 2016 Final
Rule noted that it was the 1975 five-part test that was difficult to
reconcile with the statute, or that the elements of this test, such as
the ``regular basis'' prong, do not appear in the text of ERISA.\160\
To that end, the Department notes that other cases discuss how ERISA's
statutory definition of ``fiduciary'' is broad,\161\ with one such case
indicating that the definition of ``fiduciary'' under ERISA is broader
than the more restrictive approach the Department articulated through
the 1975 five-part test.\162\
---------------------------------------------------------------------------

\160\ National Association for Fixed Annuities v. Perez, 217 F.
Supp. 3d. 1, 23, 27 (D.D.C. 2016); FACC v. U.S. Dep't of Lab., No.
3:22-CV-00243-K-BT, 2023 WL 5682411, at *18 (N.D. Tex. June 30,
2023); see Chamber, 885 F.3d at 393 (Stewart, C.J., dissenting); see
generally also Market Synergy v. U.S. Dep't of Lab., 885 F.3d 676
(10th Cir. 2018) (affirming a district court's decision in which
several challenges to the 2016 Rulemaking, as it applied to fixed
indexed annuities, were rejected).
\161\ See Eaves v. Penn, 587 F.2d 453, 458 (10th Cir. 1978);
Farm King Supply, Inc. Integrated Profit Sharing Plan & Tr. v.
Edward D. Jones & Co., 884 F.2d 288, 293 (7th Cir. 1989); see also
Thomas, Head & Greisen Emps. Tr. v. Buster, 24 F.3d 1114, 1117 (9th
Cir. 1994) (``[T]he definition of fiduciary under ERISA should be
liberally construed.'' (citing Consolidated Beef Indus. Inc. v. New
York Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991), cert. denied,
503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry Thrailkill,
Fiduciaries Under ERISA: A Narrow Path to Tread, 30 Vanderbilt L.
Rev. 1, 4-5 (1977) (referring to the ``broadness of the [statutory]
definition'' of ``fiduciary'' under ERISA, such that the definition
could cover ``insurance salesmen who recommend the purchase of
certain types of insurance and receive a commission on the sale of
such insurance'' and ``stock brokers or dealers who recommend
certain securities and then participate in the acquisition or
disposition of securities and receive a commission for their
services'').
\162\ See Farm King, 884 F.2d at 293 (discussing ``evidence of
the wide sweep given to the meaning of `fiduciary' under ERISA'' in
relation to the narrower definition codified in the 1975 test).
---------------------------------------------------------------------------

The final rule is far narrower than the previous rulemaking, which
treated all investment recommendations directed to a specific
retirement investor or investors regarding the advisability of a
particular investment or management decision as fiduciary in nature,
subject to a few carve-outs. By contrast, this rule specifically
focuses on whether the investment recommendation can be appropriately
treated as trust and confidence advice. Accordingly, and in response to
certain comments (which are discussed in greater detail below), the
final rule covers recommendations made in the following contexts:
The person either directly or indirectly (e.g., through or
together with any affiliate) makes professional investment
recommendations to investors on a regular basis as part of their
business and the recommendation is made under circumstances that would
indicate to a reasonable investor in like circumstances that the
recommendation:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
The person represents or acknowledges that they are acting
as a fiduciary under Title I of ERISA, Title II of ERISA, or both with
respect to the recommendation.
In these circumstances, the failure to treat the recommendation as
fiduciary advice would dishonor the investor's reasonable expectations
of professional advice that is offered to advance their best interest
and can be relied upon as rendered by a financial professional who
occupied a position of trust and confidence. When firms and financial
professionals meet the requirements of this definition, it would defeat
ERISA's plan-protective purposes and the investor's legitimate
expectations of trust and confidence to hold that the advice was not
fiduciary. Accordingly, this final rule is wholly consistent with the
Fifth Circuit's Chamber opinion and the broad language of the statute.
To the extent that the 1975 five-part test excluded such
recommendations, it would be underinclusive from the

[[Page 32142]]

standpoint of trust and confidence, as discussed above. For example,
under the 1975 rule, a recommendation to a plan participant to roll
over a lifetime of savings and invest them in a fixed indexed annuity
would not count as fiduciary advice if the person making the investment
recommendation had not regularly made recommendations to the investor
about plan assets. This would be true, even if the advice followed a
series of meetings about the particular financial circumstances and
needs of the investor; purported expert recommendations about how to
meet those needs and circumstances based upon consideration of the
investor's most intimate financial details; and a clear understanding
that the advice was being held out as based upon the best interest of
the investor. Moreover, the five-part test would defeat fiduciary
status even if the investor had relied upon the financial professional
for advice about all aspects of their financial life for a period of
many years encompassing many transactions, as long as that advice did
not relate to plan assets. It is hard to square such a result with a
trust and confidence test, and impossible to square the result with the
text of the statute, which contains no such limitation. The final rule
avoids such inequitable results, while limiting advice to those
circumstances in which the investor reasonably should expect fiduciary
advice.\163\ In this way, the Department believes that treating one-
time advice as fiduciary investment advice subject to ERISA is
consistent with a relationship of trust and confidence, provided that
all of the requirements of the regulatory test are satisfied.\164\
---------------------------------------------------------------------------

\163\ As also noted by the magistrate judge in Federation of
Americans for Consumer Choice v. United States Dept. of Labor, the
Fifth Circuit's opinion ``did not foreclose that Title I duties may
reach those fiduciaries who, as aligned with Title I's text, render
advice, even for the first time, `for a fee or other compensation.'
'' Findings, Conclusions, and Recommendations of the United States
Magistrate Judge, FACC, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at
*22 (N.D. Tex. June 30, 2023) (quoting ERISA section 3(21)(A)(ii),
29 U.S.C. 1002(21)(A)(ii)) (emphasis in original).
\164\ One commenter cited the Chamber opinion for the
proposition that a relationship of trust and confidence that
involves ``control and authority'' is necessary for investment
advice fiduciary status. The Department does not read the Chamber
opinion to state that ``control and authority'' is required, but
rather that the use of the terms ``control'' and ``authority'' in
the other parts of the statutory fiduciary definition (i.e., ERISA
section 3(21)(A)(i) and (iii) and Code section 4975(e)(3)(A) and
(C)) indicate that the investment advice part of the definition also
involves a ``special relationship.'' See 885 F.3d at 376-77. As
discussed herein, the final rule appropriately defines an investment
advice fiduciary to comport with reasonable investor expectations of
trust and confidence which is the special relationship described in
the Chamber opinion.
---------------------------------------------------------------------------

In the final rule, and in response to public comments, the
Department has also made changes designed to ensure that it did not
capture communications that were not properly viewed as fiduciary
advice. Thus, for example, the final rule includes a new paragraph
expressly declining fiduciary treatment for mere sales pitches that
fall short of meeting the test above. Similarly, the rule makes clear
that mere investment information or education, without an investment
recommendation, is not treated as fiduciary advice.
This rule is not only a very different rule from the one that was
before the Fifth Circuit in Chamber; it also addresses a very different
regulatory landscape. The regulatory actions taken by the SEC and NAIC
to update conduct standards reflect the understanding that broker-
dealers and insurance agents commonly make recommendations to their
customers for which they are compensated as a regular part of their
business; that investors rely upon these recommendations; and that
regulatory protections are important to ensure that the advice is in
the best interest of the retail customer, in the case of broker-
dealers, or consumers, in the case of insurance agents. In this regard,
also as discussed above, commenters informed the Department that it is
common for broker-dealers and insurance agents to hold themselves out
as trusted advisers and take deliberate steps to develop relationships
of trust and confidence with their customers.\165\ Moreover, as the SEC
has repeatedly noted, Regulation Best Interest ``draws from key
fiduciary principles underlying fiduciary obligations, including those
that apply to investment advisers'' under the Advisers Act.\166\ As a
result, the final rule is far more consistent with the SEC's regulation
of advice than was true of the 2016 Rulemaking, which represented a
significant departure from securities law regulation of broker-dealers
at the time.
---------------------------------------------------------------------------

\165\ It is also worth noting that in the litigation surrounding
the 2016 Final Rule, there were affidavits from independent
insurance agents describing ongoing relationships with their
customers in which detailed personal financial information is
shared. One such affidavit filed by Donald E. Wales in Market
Synergy Group, Inc. v. United States Department of Labor stated, ``I
take great pride and care in developing deep familiarity with my
clients' individual financial circumstances, resources, and goals.
All my sales of life insurance and fixed annuities . . . are made
following a face-to-face meeting with my clients . . . . I also
attempt to have periodic meetings with my clients . . . to review
their financial state of affairs and recommend changes . . . to
their financial plans. I proudly use the same financial products
that I recommend to my clients . . . and often share my own personal
results with them.'' Memorandum of Plaintiff-Appellant in Support of
Motion for Preliminary Injunction at Exhibit 9, Mkt. Synergy Grp.,
Inc. v. United States Dep't of Lab., No. 5:16-CV-4083-DDC-KGS, 2017
WL 661592 (D. Kan. Feb. 17, 2017), ECF No. 11-9, aff'd, 885 F.3d 676
(10th Cir. 2018).
\166\ Regulation Best Interest release, 84 FR 33318 (July 12,
2019); see also SEC Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Care Obligation, (``Both Reg BI for
broker-dealers and the IA fiduciary standard for investment advisers
are drawn from key fiduciary principles that include an obligation
to act in the retail investor's best interest and not to place their
own interests ahead of the investor's interest,'') https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.
---------------------------------------------------------------------------

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.

[[Page 32143]]

D. Discussion of the Final Rule

Under the final rule, a person is an investment advice fiduciary if
they provide a recommendation in one of the following contexts:
The person either directly or indirectly (e.g., through or
together with any affiliate) makes professional investment
recommendations to investors on a regular basis as part of their
business and the recommendation is made under circumstances that would
indicate to a reasonable investor in like circumstances that the
recommendation:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
The person represents or acknowledges that they are acting
as a fiduciary under Title I of ERISA, Title II of ERISA, or both with
respect to the recommendation.
The recommendation also must be made ``for a fee or other
compensation, direct or indirect'' as defined in the final rule.
The provisions of the final rule are organized into the following
paragraphs and discussed in greater detail below. Paragraph (c) of the
regulation defines the term ``investment advice.'' Paragraph (d)
retains the provision in the existing regulation regarding ``execution
of securities transactions.'' Paragraph (e) defines the phrase ``for
fee or other compensation, direct or indirect.'' Paragraph (f) sets
forth definitions used in the regulation. Paragraph (g) addresses
applicability of the regulation. Paragraph (h) confirms the continued
applicability of State law regulating insurance, banking, and
securities.

1. Covered Recommendations

Definition of a Recommendation
Whether a person has made a ``recommendation'' is a threshold
element in establishing the existence of fiduciary investment advice.
For purposes of the final rule, whether a recommendation has been made
will turn on the facts and circumstances of the particular situation,
including whether the communication reasonably could be viewed as a
``call to action.'' The more individually tailored the communication to
a specific customer or a targeted group of customers about a security
or other investment or group of securities or other investments, the
greater the likelihood that the communication may be viewed as a
recommendation. The determination of whether a recommendation has been
made is an objective rather than a subjective inquiry.
The Department intends that whether a recommendation has been made
will be construed in a manner consistent with the SEC's framework in
Regulation Best Interest. In the Regulation Best Interest release, the
SEC stated,

[T]he determination of whether a broker-dealer has made a
recommendation that triggers application of Regulation Best Interest
should turn on the facts and circumstances of the particular
situation and therefore, whether a recommendation has taken place is
not susceptible to a bright line definition. Factors considered in
determining whether a recommendation has taken place include whether
the communication ``reasonably could be viewed as a `call to action'
'' and ``reasonably would influence an investor to trade a
particular security or group of securities.'' The more individually
tailored the communication to a specific customer or a targeted
group of customers about a security or group of securities, the
greater the likelihood that the communication may be viewed as a
``recommendation.'' \167\
---------------------------------------------------------------------------

\167\ Regulation Best Interest release, 84 FR 33318, 33335 (July
12, 2019)(footnote omitted).

Commenters generally supported the Department's statement in the
preamble for the proposal that it intended to take an approach that is
similar to the SEC and FINRA on the definition of a recommendation, and
some asked for confirmation that the Department would interpret the
definition consistent with the SEC's framework in Regulation Best
Interest. In this regard, some commenters identified the word
``suggestion'' in the following statement in the Department's preamble,
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------

\168\ Proposed Retirement Security Rule, 88 FR 75890, 75904
(Nov. 3, 2023).

Commenters also said this was inconsistent with the SEC's approach,
although some commenters acknowledge this statement was consistent with
prior FINRA guidance--and, in fact, quoted that guidance.\169\ Based on
the word ``suggestion'' some commenters posed scenarios involving the
provision of information to a retirement investor and said those
communications would appear to be covered as recommendations under the
proposal.
---------------------------------------------------------------------------

\169\ See FINRA Regulatory Notice 11-02 (``[S]everal guiding
principles are relevant to determining whether a particular
communication could be viewed as a recommendation for purposes of
the suitability rule. For instance, a communication's content,
context and presentation are important aspects of the inquiry. The
determination of whether a ``recommendation'' has been made,
moreover, is an objective rather than subjective inquiry. An
important factor in this regard is whether--given its content,
context and manner of presentation--a particular communication from
a firm or associated person to a customer reasonably would be viewed
as a suggestion that the customer take action or refrain from taking
action regarding a security or investment strategy. In addition, the
more individually tailored the communication is to a particular
customer or customers about a specific security or investment
strategy, the more likely the communication will be viewed as a
recommendation. Furthermore, a series of actions that may not
constitute recommendations when viewed individually may amount to a
recommendation when considered in the aggregate.'') (footnote
omitted), 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\170\ Proposed Retirement Security Rule, 88 FR 75890, 75904
(November 3, 2023).
---------------------------------------------------------------------------

The Department confirms that, for purposes of the final rule, the
Department intends that whether a recommendation has been made will be
construed consistent with the SEC Regulation Best Interest and the
inquiry will focus on whether there is a ``call to action.'' To the
extent a person provides information to a retirement investor that does
not rise to the level of a recommendation as defined in this way, the
communication would not lead to fiduciary status.
However, the Department does not believe that the statements
regarding communications to a ``group'' or

[[Page 32144]]

communications about ``a selective list of securities'' are
inconsistent with the SEC's approach. Both of those concepts appear in
the SEC's discussion in the Regulation Best Interest release quoted
above that indicates that both communications to a ``targeted group of
customers'' and communications about ``a group of securities'' may be
considered recommendations.
A commenter also said that the following statement made in the
Department's preamble described a concept of a recommendation that was
too expansive and unworkable: ``a series of actions, taken directly or
indirectly (e.g., through or together with any affiliate), that may not
constitute a recommendation when each action is viewed individually may
amount to a recommendation when considered in the aggregate.'' \171\
The commenter suggested that the Department withdraw that preamble
statement and include instead an ``anti-evasion'' provision such as:
``No person shall knowingly act in a manner that functions as an
unlawful evasion of the purposes of this regulation.''
---------------------------------------------------------------------------

\171\ Id. at 75904.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\172\ See FINRA Regulatory Notice 11-02.
---------------------------------------------------------------------------

A few commenters suggested alternative definitions of a
recommendation. One commenter's proposed language focused on the nature
of a recommendation as an endorsement and expression of support for the
retirement investor making or refraining from making a specific
investment decision. Another commenter had an opposite view that the
Department should clarify that an endorsement or expression of opinion
would not rise to the level of a recommendation. The Department did not
adopt these suggestions, taking the view that it should remain
consistent with the SEC on this familiar and well-established
definitional term.
Commenters also asked the 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.
---------------------------------------------------------------------------

\173\ Regulation Best Interest release, 84 FR 33318, 33336 (July
12, 2019).
---------------------------------------------------------------------------

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 broker-dealers'
``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.
---------------------------------------------------------------------------

\174\ 17 CFR 240.15l-1(a)(1).
---------------------------------------------------------------------------

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 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

[[Page 32145]]

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, 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\
---------------------------------------------------------------------------

\175\ Proposed Retirement Security Rule, 88 FR 75890, 75905
(November 3, 2023).
\176\ Id.
---------------------------------------------------------------------------

The proposal also said that advice to a plan participant on how to
invest assets currently held in an ERISA-covered plan is ``advice with
respect to moneys or other property of such plan'' within the meaning
of ERISA section 3(21)(A)(ii), inasmuch as the assets at issue are
still held by the plan.\177\
---------------------------------------------------------------------------

\177\ Id.
---------------------------------------------------------------------------

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
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

[[Page 32146]]

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 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\179\ Regulation Best Interest release, 84 FR 33318, 33338 (July
12, 2019).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

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

The reference to ``other investment property'' is intended to
capture other investments made by plans and IRAs that are not
securities. This includes, but would not be limited to, non-securities
annuities, banking products, and digital assets (regardless of status
as a security). The Department does not see any 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,

[[Page 32147]]

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.
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 broker-dealer
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 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.'').
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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 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.'').

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

[[Page 32148]]

Recommendations on the Selection of Other Persons To Provide Investment
Advice or Investment Management
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\
---------------------------------------------------------------------------

\183\ Proposed Retirement Security Rule 88 FR 75890, 75906 (Nov.
3, 2023).
\184\ Id.
---------------------------------------------------------------------------

Commenters on the ``hire me'' discussion generally asked the
Department to allow for more expansive communications outside of ERISA
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
fiduciary in nature if the other conditions of the final rule are
satisfied.\185\
---------------------------------------------------------------------------

\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.'').
---------------------------------------------------------------------------

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

[[Page 32149]]

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:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
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
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\
---------------------------------------------------------------------------

\186\ Proposed Retirement Security Rule, 88 FR 75890, 75977
(Nov. 3, 2023).
---------------------------------------------------------------------------

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 non-fiduciary 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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

[[Page 32150]]

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

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\
---------------------------------------------------------------------------

\188\ 29 CFR 2510.3-21(c)(1)(ii)(A).

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\
---------------------------------------------------------------------------

\189\ Proposed Retirement Security Rule, 88 FR 75890, 75901
(November 3, 2023).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\190\ Id. at 75977.
\191\ Id. at 75978.
---------------------------------------------------------------------------

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 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

[[Page 32151]]

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 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.
---------------------------------------------------------------------------

\192\ Id. at 75902.
---------------------------------------------------------------------------

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\
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\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.

Another commenter asked the Department to clarify that the test
would apply based on whether the individual person making the
recommendation made regular investment 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32152]]

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.
---------------------------------------------------------------------------

\195\ The Department also would not consider salaries of human
resources employees of the plan sponsor to be a fee or other
compensation in connection with or as a result of the educational
services and materials that they provide to plan participants and
beneficiaries. Further, the 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.
---------------------------------------------------------------------------

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.
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
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.

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

[[Page 32153]]

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 ill-suited
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.
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\
---------------------------------------------------------------------------

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

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 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.

[[Page 32154]]

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.
---------------------------------------------------------------------------

\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/our-activities/resource-center/faqs/choosing-the-right-person-to-give-you-investment-advice.
---------------------------------------------------------------------------

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 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 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

[[Page 32155]]

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.
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\201\ Chamber, 885 F.3d 360, 369 (5th Cir. 2018).
---------------------------------------------------------------------------

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 (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 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

[[Page 32156]]

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.\206\Likewise, 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.
---------------------------------------------------------------------------

\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 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-dealers-and-investment-advisers.
\203\ 17 CFR 240.15l-1(a)(2)(ii).
\204\ SEC 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).
---------------------------------------------------------------------------

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 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 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.

[[Page 32157]]

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 ERISA, irrespective of the investor's reasonable
understandings.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

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

Like the proposal, the definition in the final rule makes clear
that there must be a link between the transaction-based 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

[[Page 32158]]

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.
---------------------------------------------------------------------------

\210\ Regulation Best Interest release, 84 FR 33318, 33319 (July
12, 2019).
\211\ Id.
\212\ Id. at 33402.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\213\ NAIC Model Regulation at section 5.M.
\214\ Id. at section 5.B.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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/our-activities/resource-center/advisory-opinions/1983-60a.
---------------------------------------------------------------------------

The statutory exemption for investment advice to participants and
beneficiaries of individual account plans set forth in ERISA section
408(b)(14) 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\
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

\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.'')
---------------------------------------------------------------------------

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 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

[[Page 32159]]

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\
---------------------------------------------------------------------------

\219\ See, e.g., section 202(a)(11)(C) of the Advisers Act;
Commission Interpretation Regarding the Solely Incidental Prong of
the Broker-Dealer 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.
---------------------------------------------------------------------------

In response to another commenter who requested clarification of the
analysis that would apply to non-transaction-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 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 would be minimal benefit to
plans and their participants from including these plan sponsors as
retirement investors. Other commenters suggested securities-law based
definitions such as ``accredited investors,'' ``qualified purchasers,''
or ``qualified institutional buyers.''
---------------------------------------------------------------------------

\222\ See paragraph (c)(1) of the 2016 Final Rule, 81 FR 20946,
20999 (Apr. 8, 2016).
---------------------------------------------------------------------------

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

[[Page 32160]]

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.
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
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.

[[Page 32161]]

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

\223\ Proposed paragraph (f)(6) (the term ``plan'') and (f)(3)
(the term ``IRA'').
---------------------------------------------------------------------------

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
tax-advantaged trusts and plans. However, for purposes of any
rollover of assets between a Title I Plan and an IRA described in
this preamble, the term ``IRA'' includes only an account or annuity
described in Code section 4975(e)(1)(B) or (C). Additionally, while
the Department uses the term ``retirement investor'' throughout this
document to describe advice recipients, that is not intended to
suggest that the fiduciary definition would apply only with respect
to employee pension benefit plans and IRAs that are retirement
savings vehicles. As discussed herein, the rule would apply with
respect to plans as defined in Title I and Title II of ERISA that
make investments. In this regard, see also proposed paragraph
(f)(11) that provides that the term ``investment property'' ``does
not include health insurance policies, disability insurance
policies, term life insurance policies, or other property to the
extent the policies or property do not contain an investment
component.'' \224\
---------------------------------------------------------------------------

\224\ Proposed Retirement Security Rule 88 FR 75890, 75891 n. 9
(Nov. 3, 2023).

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

[[Page 32162]]

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 IRS-approved 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\
---------------------------------------------------------------------------

\225\ Comments on the definition of investment property are
discussed in Section D.1 of this preamble.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\226\ Chamber, 885 F3d. 360, 381 (5th Cir. 2018).
\227\ See 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)).
---------------------------------------------------------------------------

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
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\
---------------------------------------------------------------------------

\228\ Proposed Retirement Security Rule 88 FR 75890, 75907-8
(Nov. 3, 2023).
\229\ Id. at 75907.
---------------------------------------------------------------------------

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 carve-outs 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's-length 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;

[[Page 32163]]

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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) 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.

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

[[Page 32164]]

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.
---------------------------------------------------------------------------

\231\ See SEC Frequently Asked Questions on Regulation Best
Interest, https://www.sec.gov/tm/faq-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 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 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.

[[Page 32165]]

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 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 participant-directed individual account
plans and their fiduciaries who choose the specific investment
alternatives that will be made available to participants for investing
their individual accounts. In connection with such offerings, platform
providers may provide investment advice, or they may simply provide
general financial information such as information on the historic
performance of asset classes and of the investment alternatives
available through the provider.
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
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's-length 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

[[Page 32166]]

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 (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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\233\ ERISA section 3(43), 29 U.S.C. 1002(43).
\234\ ERISA Section 3(43)(B), 29 U.S.C. 1002(43)(B).
---------------------------------------------------------------------------

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 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

[[Page 32167]]

rule strikes the correct balance and not to adopt changes that would
single-out PEPs and PPPs.

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.''
---------------------------------------------------------------------------

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

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 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 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\
---------------------------------------------------------------------------

\236\ Regulation Best Interest release, 33337 (July 12, 2019).
---------------------------------------------------------------------------

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 plan-information
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

[[Page 32168]]

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).''
---------------------------------------------------------------------------

\237\ Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 FR 20946, 20998 (April 8,
2016).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\238\ See IRS Notice 2020-62, 2020-35 I.R.B. 476, https://www.irs.gov/pub/irs-drop/n-20-62.pdf.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\239\ Regulation Best Interest release, 84 FR 33318, 33337 n.
181 (July 12, 2019)
---------------------------------------------------------------------------

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 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

[[Page 32169]]

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 security-based swap transactions.\243\
The CFTC and the SEC have issued final rules to implement these
requirements.\244\
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\240\ 7 U.S.C. 6s(h).
\241\ 15 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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In the Department's view, when Congress enacted the swap and
security-based swap provisions in the Dodd-Frank Act, including those
expressly applicable to ERISA-covered plans, it did not intend to
broadly 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 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.
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\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).
---------------------------------------------------------------------------

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. 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

[[Page 32170]]

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.
---------------------------------------------------------------------------

\246\ See U.S. Department of Labor, Adv. Op. 97-15A (May 22,
1997).
---------------------------------------------------------------------------

Several commenters expressed concern about plan sponsors' co-
fiduciary 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 co-fiduciary 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.
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.
---------------------------------------------------------------------------

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

One commenter suggested revisions to paragraph (d) to address
foreign broker-dealers 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 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).
---------------------------------------------------------------------------

\248\ 5 U.S.C. App. 752 (2018).
\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).
---------------------------------------------------------------------------

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

[[Page 32171]]

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 broker-dealer 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
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).
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

H. State Law

Paragraph (h) is entitled ``Continued applicability of State law
regulating insurance, banking, or securities'' and provides ``[n]othing
in this section shall be construed to affect or modify the provisions
of section 514 of Title I of the Act, including the savings clause in
section 514(b)(2)(A) for State laws that regulate insurance, banking,
or securities.'' This paragraph 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

[[Page 32172]]

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\
---------------------------------------------------------------------------

\254\ 88 FR 75890, 75912.
\255\ Id.
---------------------------------------------------------------------------

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
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 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 . . . .'').
---------------------------------------------------------------------------

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

[[Page 32173]]

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.
---------------------------------------------------------------------------

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

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 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 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.
---------------------------------------------------------------------------

\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 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.
---------------------------------------------------------------------------

Comment Period
After the rulemaking was proposed, the Department received several
requests for an extension of the public comment period beyond the
original 60-day 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

The APA does not specify a minimum number of days for a comment
period,

[[Page 32174]]

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.
---------------------------------------------------------------------------

\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 Sec. 6(a)(1); E.O. 13563 Sec. 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).
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

\267\ 88 FR at 75929 fn. 290, 75931 fn. 299.
---------------------------------------------------------------------------

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 broker-dealers.\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.
---------------------------------------------------------------------------

\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-sell-high-the-ability-of-investors-to-time-purchases-and-sales-of-mutual-funds.pdf.
\270\ 88 FR at 75943, 75943 fn. 414.
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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 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.
---------------------------------------------------------------------------

\271\ 88 FR at 75929-31.
\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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/.
---------------------------------------------------------------------------

L. Other Legal Issues ²⁷⁴
---------------------------------------------------------------------------

\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 Sec. 4, 77 FR
1088 (Jan. 9, 2012).
---------------------------------------------------------------------------

McCarran-Ferguson Act

A few commenters raised questions about the role of the McCarran-
Ferguson

[[Page 32175]]

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

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 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\
---------------------------------------------------------------------------

\279\ West Virginia v. EPA, 597 U.S. 697, 721 (2022).
\280\ Id. at 723.
---------------------------------------------------------------------------

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 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 ever-changing facts and circumstances
surrounding [employee benefit plans and their fiduciaries]'' of any
agency.\286\
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

\287\ 29 U.S.C. 1108(a), 1135.
\288\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
---------------------------------------------------------------------------

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.

[[Page 32176]]

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 tax-preferred
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.
---------------------------------------------------------------------------

\289\ Nat'l Inst. of Fam. & Lifdvocs. v. Becerra, 138 S. Ct.
2361, 2372-73, 2377 (2018) [hereinafter NIFLA] (citations omitted).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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
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 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''
robo-advice 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.

[[Page 32177]]

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 non-
securities-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.
---------------------------------------------------------------------------

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

The Department has examined the effect of the rulemaking as
required by Executive Order 13563,\293\ Executive Order 12866,\294\ the
Regulatory Flexibility Act,\295\ section 202 of the Unfunded Mandates
Reform Act,\296\ and Executive Order 13132.\297\
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\293\ 76 FR 3821 (Jan. 21, 2011).
\294\ 58 FR 51735 (Oct. 4, 1993).
\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).
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

\298\ 88 FR 21879 (Apr. 6, 2023).

(1) have an annual effect on the economy of $200 million or more
(adjusted every three years by the Administrator of the Office of
Information and Regulatory Affairs (OIRA) for changes in gross
domestic product); or adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs,
the environment, public health or safety, or State, local,
Territorial, or Tribal governments or communities;
(2) create a serious inconsistency or otherwise interfere with
an action taken or planned by another agency;
(3) materially alter the budgetary impacts of entitlement
grants, user fees, or loan programs or the rights and obligations of
recipients thereof; or
(4) raise legal or policy issues for which centralized review
would meaningfully further the President's priorities or the
principles set forth in the Executive order, as specifically
authorized in a timely manner by the Administrator of OIRA in each
case.

It has been determined that this 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).

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\
---------------------------------------------------------------------------

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

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

[[Page 32178]]

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:
---------------------------------------------------------------------------

\301\ Employee Benefits Security Administration (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-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

statistical comparisons finding poorer risk-adjusted
investment performance in more conflicted settings;
experimental and audit studies revealing questionable
investment advice provider conduct, including recommendations to
withdraw from low-cost, well diversified portfolios and invest in
higher-cost alternatives likely to deliver inferior results;
studies detailing gaps in consumers' financial literacy,
errors in their financial decision-making, and the inadequacy of
disclosure as a consumer protection;
Federal agency reports documenting abuse and investors'
vulnerability;
economic theory, which predicts that when expert
investment advice providers have conflicts of interest, non-expert
investors will be harmed; and
international experience with harmful advisory conflicts
and responsive reforms.
The Department's analysis found that conflicted 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 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.
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.
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\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-improving-financial-literacy-supports-retirement-wellness-and-confidence. 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/private-pension-plan-bulletin-historical-tables-and-graphs.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/
private-pension-plan-bulletins-abstract-2021.pdf.
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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

[[Page 32179]]

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\
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\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-private-industry-workers-2022.htm.
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In 1981, private defined benefit plans held more than twice the
assets in private defined contribution plans, and roughly 10 times more
than IRA assets. By the 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\
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\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).
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Moreover, workers have become more reliant on their retirement
savings as Social Security benefits have eroded in recent decades. The
age to receive full retirement benefits is gradually increasing from 65
to 67 between 2003 and 2027. Those who claim Social Security before 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\
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\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 & D (Aug. 2021), https://www.ssa.gov/oact/NOTES/ran9/an2021-9.pdf.
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Investment Advice and the 1975 Regulation
As the nature of retirement savings has changed since 1975,
investment advice has also evolved. Commercial relationships between
employment-based 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 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 ERISA-covered plan overseen by professional ERISA fiduciaries to
purchase an annuity, the person making the recommendation with respect
to the purchase of the annuity has no obligation to adhere to a best
interest standard unless they meet all prongs of the 1975 rule,
including regularly giving advice to the plan participant. This is true
even if the person giving the advice holds themselves out as an
investment expert whose recommendation is based solely on a careful and
individualized assessment of the investor's needs 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

[[Page 32180]]

in the text of ERISA, which makes no mention of a ``regular basis''
requirement.
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\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 five-part test to be considered an
ERISA fiduciary. See Carfora v. TIAA, 631 F. Supp. 3d 125, 138
(S.D.N.Y. 2022).
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When the Department issued PTE 2020-02, it sought to ameliorate
some of the effects of the regular basis requirement by suggesting that
rollover advice could be treated as falling within the 1975 rule if it
was rendered at the beginning of an ongoing advisory relationship.
Accordingly, in an April 2021 FAQ, in the context of advice to roll
over assets from an employee benefit plan to an IRA, the Department
acknowledged that a single instance of advice would not satisfy the
regular basis prong of the 1975 test \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\
---------------------------------------------------------------------------

\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/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption; Notably, although the Department does not think that a
single instance of advice would satisfy the regular basis prong of
the 1975 regulation, a single 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/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.
---------------------------------------------------------------------------

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 ERISA-governed plan.
However, after the rollover, any future advice will be with respect to
a new non-ERISA plan, such as an IRA that contains new assets from the
rollover. The professional's one-time rollover advice is thus the last
advice that he or she makes to the specific plan.'' \315\ As a result,
the first instance 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.
---------------------------------------------------------------------------

\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 complete, any future provision of
advice is, by nature, no longer to that ERISA plan.''); Findings,
Conclusions, and Recommendations of the United States Magistrate
Judge, Federation of Americans for Consumer Choice v. U.S. Dep't of
Labor, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at *18 (N.D. Tex.
June 30, 2023) (``ERISA's text defines Title I and Title II `plans'
distinctly. By utilizing these separate definitions, Congress
indicated how each Title's plans should be treated differently due
to the nature of the relationship between financial professionals
and Retirement Investors in Title I and Title II Plans. As the New
Interpretation purports to consider recommendations as to Title II
Plans when determining Title I fiduciary status, it conflicts with
ERISA.'') (internal citation omitted).
---------------------------------------------------------------------------

Inexpert Customers
Researchers have consistently found that many Americans demonstrate
low levels of financial knowledge and lack basic understanding of
investment strategies. In particular, 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\
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\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).
---------------------------------------------------------------------------

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
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.
---------------------------------------------------------------------------

\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).
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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 non-
retired 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

[[Page 32181]]

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.
---------------------------------------------------------------------------

\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-and-regulations/rules-and-regulations/completed-rulemaking/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/rules-and-regulations/completed-rulemaking/1210-AB32-2/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/uploads/2019/10/FINRA_GFLEC_Investor_FinancialIlliteracy_Report_FINAL.pdf?x20348.
---------------------------------------------------------------------------

The SEC has commissioned several studies on whether investors can
differentiate between different types of investment service providers.
A 2005 study considered four focus groups in different geographic
locations and found that investors were generally unclear about
distinctions between broker-dealers, financial advisers, investment
advisers, and financial planners and often used the terms
indistinguishably.\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.
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\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.
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Confusion regarding the different types of advice providers and the
different standards of conduct to which they must adhere is often made
worse by industry marketing and other practices.\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 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 broker-dealers offer in
a way that is distinct from other required disclosures under the
securities laws.\328\
---------------------------------------------------------------------------

\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.
\327\ SEC, Form CRS Relationship Summary: Amendments to Form
ADV, (September 19, 2019). https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary
\328\ Form CRS Relationship Summary; Amendments to Form ADV, 84
FR 33492 (July 12, 2019).
---------------------------------------------------------------------------

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 advice are at greater risk of being persuaded to make
decisions that are not in their best interest.
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\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-and-regulations/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).
---------------------------------------------------------------------------

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\
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\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-and-regulations/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-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
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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

[[Page 32182]]

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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\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.
\339\ For example, an ERISA plan investor who rolls $200,000
into an IRA, earns a 6 percent nominal rate of return with 2.3
percent inflation, and aims to spend down her savings in 30 years,
would be able to consume $11,034 per year for the 30-year period. A
similar investor whose assets underperform by 0.5, 1, or 2
percentage points per year would only be able to consume $10,359,
$9,705, or $8,466, respectively, in each of the 30 years. The 0.5
and 1 percentage point figures represent estimates of the
underperformance of retail mutual funds sold by potentially
conflicted brokers. These figures are based on a large body of
literature cited in the 2015 NPRM RIA, comments on the 2015 NPRM
RIA, and testimony at the Department's hearing on conflicts of
interest in investment advice in August 2015. The 2-percentage point
figure illustrates a scenario for an individual where the impact of
conflicts of interest is more severe than average. See 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/rules-and-regulations/completed-rulemaking/1210-AB32-2/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.
---------------------------------------------------------------------------

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 self-dealing
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\
---------------------------------------------------------------------------

\341\ Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., 74
Regulatory Arbitrage and the Persistence of Financial Misconduct,
Stanford Law Review 797, (2022).
---------------------------------------------------------------------------

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 risk-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 retirement-income 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 ERISA-
covered 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.
---------------------------------------------------------------------------

\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/gj5skfflsip2nhee1662c/Draft.pdf?rlkey=msd12c734n8ddrct8uzqg0qut&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.
---------------------------------------------------------------------------

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 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 broker-dealers
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\
---------------------------------------------------------------------------

\346\ See 17 CFR 240.15l-1.
\347\ 84 FR 33318, 33320 (July 12, 2019).
\348\ Id. at 33321.
---------------------------------------------------------------------------

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,
---------------------------------------------------------------------------

\349\ Id. at 33318.
\350\ 17 CFR 240.15l-1(b)(3).

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\
---------------------------------------------------------------------------

\351\ Staff Bulletin: Standards of Conduct for Broker-Dealers
and Investment Advisers Conflict of Interest, https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.
---------------------------------------------------------------------------

The SEC Investment Adviser Interpretation, published
simultaneously with

[[Page 32183]]

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\
---------------------------------------------------------------------------

\352\ 84 FR 33669 (July 12, 2019).
\353\ Id. at 33671 (footnote omitted).
\354\ Id. at 33670.
\355\ Id. at 33671.
---------------------------------------------------------------------------

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.\356\
---------------------------------------------------------------------------

\356\ Id. (footnote omitted).

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 non-retail 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' 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\
---------------------------------------------------------------------------

\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-Report-November-2021_FINAL.pdf?_hsenc=p2ANqtz-8omG4E39GJ9JKayUxU4AB8lSU7LF_fvSNO6yCo9KraMk81h65TjgkywccFhKf2QJUpgyaoj1iNEfMJ-b-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-Formatted-8.29.23.pdf.
\358\ Ibid.
---------------------------------------------------------------------------

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), highly-leveraged
products, private securities, cryptocurrency or other digital assets,
Special-purpose Acquisition Companies (SPACs), leveraged or inverse
ETFs/ETNs, and penny stocks or other thinly-traded 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\
---------------------------------------------------------------------------

\359\ Ibid.
\360\ Ibid.
---------------------------------------------------------------------------

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 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 broker-dealers 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\
---------------------------------------------------------------------------

\361\ SEC, Risk Alert: Observations from Broker-Dealer
Examinations Related to Regulation Best Interest, (Jan. 30, 2023),
https://www.sec.gov/file/exams-reg-bi-alert-13023.pdf.
\362\ FINRA, 2023 Report on FINRA's Examination and Risk
Monitoring Program, (Jan. 2023), https://www.finra.org/sites/default/files/2023-01/2023-report-finras-examination-risk-monitoring-program.pdf.
\363\ SEC, Risk Alert: Observations from Broker-Dealer
Examinations Related to Regulation Best Interest, (Jan. 30, 2023),
https://www.sec.gov/file/exams-reg-bi-alert-13023.pdf.
\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-and-investment-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-conflicts-
interest; Securities and Exchange Commission, Staff Bulletin:
Standards of Conduct for Broker-Dealers and Investment Advisers Care
Obligation, (Apr. 20, 2023), https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.
---------------------------------------------------------------------------

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

[[Page 32184]]

recommendations to retail customers to open a TIAA IRA.\368\ Meanwhile,
FINRA levied its first Regulation Best Interest-related fine in October
2022 and suspended two New York-based brokers in February 2023.\369\
---------------------------------------------------------------------------

\365\ SEC, Risk Alert: Observations from Broker-Dealer
Examinations Related to Regulation Best Interest, p. 1, (Jan. 30,
2023), https://www.sec.gov/file/exams-reg-bi-alert-13023.pdf.
\366\ See SEC, Press Release: SEC Charges Broker-Dealer with
Violations of Regulation Best Interest and Fraud for Excessive
Trading in Customer Accounts, (Sept. 28, 2023), https://www.sec.gov/enforce/34-98619-s; SEC Charges Broker-Dealers with Violations of
Regulation Best Interest and Form CRS Rules for Failing to Effect
Delivery of Required Disclosures, (Sept. 28, 2023), https://www.sec.gov/enforce/34-98609-s; and SEC Charges Wisconsin Broker-
Dealer with Violations of Regulation Best Interest, (Sept. 22,
2023), https://www.sec.gov/enforce/34-98478-s.
\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.
\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/finra-fines-long-island-bd-over-reg-bi/.
---------------------------------------------------------------------------

Conflicts of Interest in Advice Given to Plan Fiduciaries
Concerns regarding investment advice extend to that received by
ERISA plan fiduciaries. Pool et al. (2016) found that while mutual fund
companies involved in plan management for 401(k) plans included both
funds from their own family as well as unaffiliated funds in the menu
of investment options, poor performing funds were less likely to be
removed and more likely to be added to the menu if they were affiliated
with the plan trustee.\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 plan participants vulnerable to
lower returns due to conflicted advice.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

The decision to roll over one's retirement savings from an ERISA-
covered 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\
---------------------------------------------------------------------------

\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/per28-01.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).
---------------------------------------------------------------------------

Retiring workers must decide how best to invest a career's worth of
401(k) savings, and many look to an investment advice provider for
guidance. Financial Institutions face an innate conflict of interest,
in that a Financial Institution that provides a recommendation or
advice concerning a rollover to a Retirement Investor may expect to
earn transaction-based compensation such as commissions and/or receive
an ongoing advisory fee that it likely would not receive if the assets
were to remain in an ERISA-covered plan. Further, under the 1975 rule,
if an investment advice provider makes a one-time recommendation that
the worker move the entire balance of their retirement plan into an IRA
and invest it in a particular annuity, 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.
---------------------------------------------------------------------------

\378\ For more information on the different regulatory regimes,
refer to the Regulatory Baseline section in this analysis.
---------------------------------------------------------------------------

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

[[Page 32185]]

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 misconduct creates incentives
for the worst advisers to migrate to more poorly regulated State
regimes.\379\
---------------------------------------------------------------------------

\379\ Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., 74
Regulatory Arbitrage and the Persistence of Financial Misconduct,
Stanford Law Review 797, (2022).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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-year-in-2023/.
---------------------------------------------------------------------------

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 non-securities 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 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.
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\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 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.'' 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.
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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\

[[Page 32186]]

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.
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\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 Division, Individual Retirement
Arrangements Study, February 2022.
---------------------------------------------------------------------------

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 firm-level 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 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 broker-
dealers and investment advisers alike to act in their best interest
when giving advice and making recommendation.'' \389\
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\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-retirement-investor-expectations-from-financial-advisors-survey.pdf?la=en&hash=D191BA975D8D4D9E03B5A02CAF029619.
\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.
---------------------------------------------------------------------------

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 broker-dealers
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\
---------------------------------------------------------------------------

\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-dealers-and-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-bulletin-
conflicts-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-dealers-and-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.
---------------------------------------------------------------------------

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

[[Page 32187]]

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.
---------------------------------------------------------------------------

\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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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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\394\ EBSA tabulations based on The Board of Governors of the
Federal Reserve System, Financial Accounts of the United States,
December 7, 2023.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\395\ Ibid.

Table 1--Market Description of Selected Commonly Held Assets, 2022
[In USD billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Securities Non-securities
-------------------------------------------------------------------------------------------
Money Variable Fixed Total
Equities Bonds \2\ market Mutual annuities annuities Bank
\1\ funds \3\ funds \3\ \4\ \4\ deposits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Assets.................................... $64,723 $53,890 $5,223 $17,333 $2,016 $1,740 $23,597 $168,522
Retail Investor................................. $26,505 $4,593 $3,080 $9,749 $2,016 $1,740 $14,809 $62,491
Institutional Investor.......................... $38,218 $49,297 $2,143 $7,584 ........... ........... $8,788 $106,030
Private Pension Investor........................ $2,929 $1,688 $228 $4,386 (\5\) (\5\) $42
Public Pension Investor......................... $3,390 $3,755 $23 $230 (\5\) (\5\) $33
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-Year Asset Growth............................ 9.20% 3.70% 5.70% 2.60% 3.00% 6.00% 6.70% 5.80%
Retail Investor................................. 10.80% -0.50% 5.80% 2.90% 3.00% 6.00% 6.80% 6.40%
Institutional Investor.......................... 8.20% 4.20% 5.60% 2.30% ........... ........... 6.60% 5.50%
Private Pension Investor........................ 4.50% 4.50% 4.90% 5.30% (\5\) (\5\) -0.60%
Public Pension Investor......................... 4.80% 5.20% -8.00% -3.50% (\5\) (\5\) -0.90%
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.

[[Page 32188]]

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.
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\
---------------------------------------------------------------------------

\396\ SEC, Annuities, (2021), https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
\397\ Frank Fabozzi, The Handbook of Financial Instruments, 596-
599 (2002).
---------------------------------------------------------------------------

In a fixed annuity, an insurance company agrees to pay the
investor no less than a specified rate of interest during the asset
accumulation phase and to pay a specified amount per dollar in the
decumulation phase.^{398 399}
---------------------------------------------------------------------------

\398\ SEC, Annuities, (2021), https://www.investor.gov/introduction-investing/investing-basics/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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\400\ SEC, Updated Investor Bulletin: Indexed Annuities, (July
2020), https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-13. See also FINRA Rule 2330.
---------------------------------------------------------------------------

Annuity regulators also vary by type. While all annuity products
are subject to State regulation, variable annuities and some indexed
annuities are considered securities, and therefore are also subject to
SEC and FINRA regulations.\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\
---------------------------------------------------------------------------

\401\ SEC, Annuities, (2021), https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
\402\ Constantijn Panis & Kathik Padmanabhan, Literature Review
of Conflicted Advice in Annuities Markets, Internal Report for
Department of Labor (February 2023).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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/annuity-estimates-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.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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-of-Individual-Annuity-Contracts-2022.pdf.
---------------------------------------------------------------------------

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

[[Page 32189]]

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.
---------------------------------------------------------------------------

\411\ See Chamber, 885 F.3d 360 (5th Cir. 2018).
\412\ Aron Szapiro & Paul Ellenbogen, Early Evidence on the
Department of Labor Conflict of Interest Rule: New Share Classes
Should Reduce Conflicted Advice, Likely Improving Outcomes for
Investors, Morningstar, (April 2017); Jasmin Sethi, Jake Spiegel, &
Aron Szapiro, Conflicts of Interest in Mutual Fund Sales: What Do
the Data Tell Us?, 6(3) The Journal of Retirement 46-59, (2019); Lia
Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation Best Interest
Meets Opaque Practices: It's Time to Dive Past Superficial Conflicts
of Interest, Morningstar, (November 2019), https://ccl.yale.edu/sites/default/files/files/wp_Conflicts_Of_Interest_111319%20FINAL.pdf; Mark Egan, Shan Ge, &
Johnny Tang, Conflicting Interests and the Effect of Fiduciary
Duty--Evidence from Variable Annuities, 35(12) Review of Financial
Studies 5334-5386 (December 2022).
---------------------------------------------------------------------------

In 2020, the Department issued a technical amendment to the CFR to
reinsert the 1975 rule and published PTE 2020-02. The exemption is
available to registered investment advisers, broker-dealers, banks, and
insurance companies and their individual employees, agents, and
representatives that provide fiduciary investment advice to Retirement
Investors. However, the exemption explicitly excluded investment advice
solely generated by an interactive website, referred to as ``pure robo-
advice.'' \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 prohibited transactions arising as a
result of investment advice to roll over assets from a plan to an IRA,
under certain conditions.
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

\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
commission-based account to a fee-based account). The requirement to
document the specific reasons for these recommendations is part of
the required policies and procedures, in Section II(c)(3).''
---------------------------------------------------------------------------

In order to ensure that Financial Institutions provide reasonable
oversight of Investment Professionals and adopt a culture of
compliance, the exemption provides that Financial Institutions and
Investment Professionals will be ineligible to rely on the exemption
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 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 broker-dealer to act in the best interest of a
retail customer when making a recommendation of any securities
transaction or investment strategy involving securities.\417\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 robo-adviser and the services it provides, the need to ensure
that the robo-adviser is

[[Page 32190]]

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 broker-dealers 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\
---------------------------------------------------------------------------

\419\ Regulation Best Interest, 84 FR 33318, 33383 (July 12,
2019).

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\
---------------------------------------------------------------------------

\420\ Commission Interpretation Regarding Standard of Conduct of
Investment Advisers, 84 FR 33669, 33674 (July 12, 2019).

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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
----------------------------------------------------------------------------------------------------------------
Legislation or Title of legislation or
State regulation regulation Affected entities
----------------------------------------------------------------------------------------------------------------
Alabama........................... Regulation........... Suitability in Annuity Insurers, Broker-Dealers,
Transactions. and Independent
Producers.
Alaska............................ Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Arizona........................... Legislation.......... An Act Relating to Annuity Insurers and Independent
Transactions. Producers.
Regulation........... Article 2--Transaction of Insurers and Independent
Insurance. Producers.
Arkansas.......................... Regulation........... Stability in Annuity Insurers and Independent
Transactions. Producers.
California........................ Legislation.......... An Act Relating to Insurers and Independent
Annuities and Life Producers.
Insurance Policies.
Colorado.......................... Regulation........... Colorado Securities Act: Investment Advisers,
Dishonest and Unethical Investment Adviser
Conduct. Representatives, and
Federal Covered
Advisers.
Regulation........... Concerning Best Interest Insurers and Independent
Obligations and Producers.
Supervision in Annuity
Transactions.
Connecticut....................... Legislation.......... Consumers Doing Business Financial Planners.
with Financial Planners.
Legislation.......... An Act Requiring Administrators to
Administrators of Certain Municipal 403(b) Plans.
Retirement Plans to
Disclose Conflicts of
Interest.
Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Delaware.......................... Regulation........... Stability in Annuity Insurers and Independent
Transactions. Producers.
Florida........................... Legislation.......... Consumer Protection....... Insurers and Insurance
Agents.
Georgia........................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Hawaii............................ Legislation.......... An Act Relating to Insurers and Independent
Insurance. Producers.
Idaho............................. Legislation.......... Annuity Consumer Insurers and Independent
Protections Act. Producers.
Illinois.......................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.

[[Page 32191]]

Indiana........................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Iowa.............................. Regulation........... Rulemaking Related to Best Insurers and Independent
Interest Standard for Producers.
Insurance Professionals.
Kansas............................ Regulation........... Policy and Procedure on Insurers and Independent
Suitability in Annuity Producers.
Transactions.
Kentucky.......................... Regulation........... Stability in Annuity Insurers and Independent
Transactions. Producers.
Louisiana......................... Legislation.......... Provides Relative to Venue Insurance Commissioner.
for Direct Actions by
Third Parties Against
Insurers.
Maine............................. Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Maryland.......................... Legislation.......... Financial Consumer N/A.
Protection Act of 2018.
Regulation........... Suitability in Annuity Insurers and Independent
Transaction. Producers.
Massachusetts \422\............... Regulation........... Suitability in Annuity Investment Advisers,
Transactions. Financial Planners,
Broker-Dealers,
Insurers, and
Independent Producers.
Regulation........... Amendments to Fiduciary Broker-Dealers and
Conduct Standards. Agents.
Regulation........... Amendments to Investment Investment Advisers.
Adviser Disclosure
Regulations.
Michigan.......................... Legislation.......... Amendments to An Act to Insurers and Independent
Revise, Consolidate, and Producers.
Classify the Law Relating
to the Insurance and
Surety Business.
Minnesota......................... Legislation.......... Annuity Suitability Insurers and Independent
Regulation Modification. Producers.
Regulation........... Insurance Industry Trade Insurers and Independent
Practices. Producers.
Mississippi....................... Regulation........... Annuity Transactions Model Insurers and Independent
Producers.
Montana........................... Legislation.......... An Act to Revise Insurance Insurers and Independent
Laws Related to Annuities. Producers.
Regulation........... Securities Regulation..... Investment Advisers,
Investment Adviser
Representatives, and
Federal Covered
Advisers.
Nebraska.......................... Legislation.......... An Act relating to the Insurers and Independent
Nebraska Protections in Producers.
Annuity Transactions Act.
Nevada............................ Legislation.......... An Act Relating to Broker-Dealers, Sales
Financial Planners; Representatives,
Imposing a Fiduciary Duty Investment Advisers, and
on Broker-Dealers, Sales Investment Adviser
Representatives and Representatives.
Investment Advisers Who
for Compensation Advise
Other Persons Concerning
the Investment of Money.
New Hampshire..................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
New Mexico........................ Regulation........... Suitability and Annuity Insurers and Independent
Transactions. Producers.
New York.......................... Regulation........... Suitability and Best Insurers and Independent
Interests in Life Producers.
Insurance and Annuity
Transactions.
North Carolina.................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
North Dakota...................... Legislation.......... An Act Relating to Annuity Insurers and Independent
Transaction Practices. Producers.
Ohio.............................. Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Oklahoma.......................... Regulation........... Standards of Ethical Investment Advisers and
Practices. Investment Adviser
Representatives.
Regulation........... Standards of Ethical Broker-Dealers and
Practices for Broker- Agents.
Dealers and Their Agents.
Oregon............................ Legislation.......... An Act Relating to Insurers and Independent
Annuities. Producers.
Pennsylvania...................... Legislation.......... An Act amending the Insurers and Independent
Insurance Company Law of Producers.
1921.
Rhode Island...................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
South Carolina.................... Regulation........... Suitability in Annuity Independent Producers,
Transactions. Broker-Dealers, Agents,
and Plan Fiduciaries.
South Dakota...................... Legislation.......... An Act to Revise Annuity Broker-Dealers,
Sales Standards. Investment Advisers,
Insurers, and
Independent Producers.
Tennessee......................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Texas............................. Legislation.......... Relating to Disclosures Insurers and Agents.
and Standards Required
for Certain Annuity
Transactions and Benefits
Under Certain Annuity
Contracts.
Utah.............................. Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Vermont........................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Virginia.......................... Regulation........... Rules Governing Insurers and Independent
Suitability in Annuity Producers.
Transactions.
Washington........................ Legislation.......... Concerning the Best Insurers and Independent
Interest Standard for Producers.
Annuity Transactions.
Regulation........... Suitability Standard for Insurers and Independent
Annuity Transactions. Producers.
West Virginia..................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Wisconsin......................... Legislation.......... An Act Relating to Best Insurers, Independent
Interest in Annuity Producers, Investment
Transactions. Advisers, and Broker-
Dealers.

[[Page 32192]]

Wyoming........................... Regulation........... Regulation Governing Insurers and Independent
Suitability in Annuity Producers.
Transactions.
----------------------------------------------------------------------------------------------------------------

Summary of State Legislative and Regulatory Developments
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\425\ Missouri and New Jersey have introduced legislation and/or
regulation.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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 .
---------------------------------------------------------------------------

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 recommendation, must exercise reasonable
diligence, care and skill to:
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 ``non-cash
compensation'' is also broadly defined to include ``any form of
compensation that is not cash compensation, including, but not limited
to, health insurance, office rent, office support and retirement
benefits.'' \431\
---------------------------------------------------------------------------

\430\ Id. at section 5.I.
\431\ Id. at section 5.B. and J.
---------------------------------------------------------------------------

This limited regulation of conflicts of interest departs
substantially from both ERISA's treatment of such conflicts as giving
rise to prohibited transactions

[[Page 32193]]

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:
---------------------------------------------------------------------------

\432\ Staff Bulletin: Standards of Conduct for Broker-Dealers
and Investment Advisers Conflict of Interest, https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.
---------------------------------------------------------------------------

compensation, revenue or other benefits (financial or
otherwise) to the firm or its affiliates, including fees and other
charges for the services provided to retail investors (for example,
compensation based on assets gathered and/or products sold, including
but not limited to receipt of assets under management (``AUM'') or
engagement fees, commissions, markups, payment for order flow, cash
sweep programs, or other sales charges) or payments from third parties
whether or not related to sales or distribution (for example, sub-
accounting or administrative services fees paid by a fund or revenue
sharing);
compensation, revenue or other benefits (financial or
otherwise) to financial professionals from their firm or its affiliates
(for example, compensation or other rewards associated with quotas,
bonuses, sales contests, special awards; differential or variable
compensation based on the product sold, accounts recommended, AUM, or
services provided; incentives tied to appraisals or performance
reviews; forgivable loans based upon the achievement of specified
performance goals related to asset accumulation, revenue benchmarks,
client transfer, or client retention);
compensation, revenue or other benefits (financial or
otherwise) (including, but not limited to, gifts, entertainment, meals,
travel, and related benefits, including in connection with the
financial professional's attendance at third-party sponsored trainings
and conferences) to the financial professionals resulting from other
business or personal relationships the financial professional may have,
relationships with third parties that may relate to the financial
professional's association or affiliation with the firm or with another
firm (whether affiliated or unaffiliated), or other relationships
within the firm; and
compensation, revenue or other benefits (financial or
otherwise) to the firm or its affiliates resulting from the firm's or
its financial professionals' sales or offer of proprietary products or
services, or products or services of affiliates.\433\
---------------------------------------------------------------------------

\433\ Id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\434\ Id. at Sec. 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)).
---------------------------------------------------------------------------

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 tolerance,
financial circumstances, and needs of the Retirement Investor.
---------------------------------------------------------------------------

\435\ 84 FR 33318, 33458, 33491 (July 12, 2019) (emphasis
added).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32194]]

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.
---------------------------------------------------------------------------

\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-year-in-2023/.
---------------------------------------------------------------------------

Summary
The recent regulatory and market developments, combined with the
judicial vacatur of the 2016 Final Rule, provide for a different
baseline than the pre-2016 Final Rule baseline. While some reforms and
improvements in the delivery of advice have endured despite the
vacatur, without new regulatory action, gains made to some products and
markets that are not covered by recent regulatory actions by the
Department, SEC, or States, could be derailed. Other regulatory
agencies have worked to reduce conflicts of interest, but this has
resulted in a ``patchwork'' approach to regulating advice arrangements
of retirement investments,\443\ which has already resulted in the most
conflicted advisers moving to markets with the least oversight.\444\
---------------------------------------------------------------------------

\443\ Eversheds Sutherland. ``Getting the Full Picture: The
Emerging Best Interest and Fiduciary Duty Patchwork.'' (August
2020), https://www.jdsupra.com/legalnews/the-emerging-patchwork-of-fiduciary-54761/.
\444\ Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr.,
Regulatory Arbitrage and the Persistence of Financial Misconduct, 74
Stanford Law Review 797 (2022).
---------------------------------------------------------------------------

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 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.

[[Page 32195]]

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: Estimate Year dollar Discount rate Period covered
(percent)
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($million/Year).......... $359.9 2024 7 2024-2033
356.0 2024 3 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.............................................................
----------------------------------------------------------------------------------------------------------------

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 broker-dealers 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 broker-dealer'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 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\
---------------------------------------------------------------------------

\445\ Regulation Best Interest, 84 FR 33318, 33447 (July 12,
2019).
\446\ Regulation Best Interest, 84 FR 33318, 33491 (July 12,
2019).
\447\ Regulation Best Interest, 84 FR 33318, 33458 (July 12,
2019).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\448\ For more information, refer to the Benefits of a Fiduciary
or Best Interest Standard section.
---------------------------------------------------------------------------

The Department believes that this rulemaking, by requiring advisers
to provide Retirement Investors with information about the basis of
their recommendations, fees, and potential 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

[[Page 32196]]

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.
---------------------------------------------------------------------------

\449\ NPRM #290 (Morningstar).
\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 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/gj5skfflsip2nhee1662c/Draft.pdf?rlkey=msd12c734n8ddrct8uzqg0qut&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 x 70% of the
assets not covered by a fiduciary standard x 80% covered by ERISA x
0.25% increase in returns = $5.3 billion.

Table 4--Summary of Quantified Benefit or Transfer Estimates
----------------------------------------------------------------------------------------------------------------
Average annual
benefit or
Market segment Source transfer: first Estimate
10 years
(billion)
----------------------------------------------------------------------------------------------------------------
Plan Participants.................... Comment Letter from $5.5 The rule would result in
Morningstar \449\. 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.
Annuities............................ Comment Letter from 3.3 The rule would result in
Morningstar \450\. Retirement Investors rolling
retirement funds into fixed
index annuities saving $32.5
billion in the first 10
years.
Council of Economic 7.0 CEA provided an illustration
Advisers \451\. 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.
Vivek Bhattacharya, ................ Bhattacharya et al. (2024)
Gaston Illanes, & found that a common law
Manisha Padi (2024) fiduciary duty increased
\453\. risk-adjusted returns by 25
basis points in annuity
investments.
Department of Labor 5.3 If $3.8 trillion dollars are
Illustration, based on invested in annuities, 70
Bhattacharya et al. percent of the market is not
(2024). 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\
----------------------------------------------------------------------------------------------------------------

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 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
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

[[Page 32197]]

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 broker-
dealers.\455\ The Department has revised this rulemaking, however, to
make PTE 2020-02 largely consistent with the requirements of Regulation
Best Interest, even more so in this final rulemaking than in the
proposal. As most broker-dealers 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.
---------------------------------------------------------------------------

\455\ NPRM #342 (Financial Services Institute).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\456\ NPRM #395 (Investment Company Institute).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\457\ The annualized benefits, costs, and transfers spread the
effects equally over each period, taking account of the discount
rate. The annualized value 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).
\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).

Table 5--Summary of Quantified Cost Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized, 7% discount rate
Focus Source First-year Subsequent years \457\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total............................. Department of Labor: $536.8 million................ $332.7 million................ $359.9 million.
Final.
Department of Labor: $253.2 million................ $216.2 million................ $316.7 million.
NPRM.
Adjusted NPRM $3.0 billion.................. $2.6 billion.................. $2.7 billion.
Estimate: Multiplied
by 12.
Total: Broker-Dealers............. Department of Labor: $37.5 million................. $28.9 million................. $21.2million.
Final.
Comment Letter from $2.8 billion.................. $2.5 billion.................. $2.5 billion.
Financial Services
Institute \458\.
PTE 2020-02....................... Department of Labor: $248.1 million................ $165.5 million................ $176.5 million.
Final.
Department of Labor: $231.5 million................ $197.3 million................ $201.9 million.
NPRM.
Comment Letter from $2.9 billion.................. N/A........................... N/A.
Investment Company
Institute \459\.
PTE 84-24......................... Department of Labor: $288.7 million................ $167.2 million................ $183.4 million.
Final.

[[Page 32198]]

Department of Labor: $18.1 million................. $15.3 million................. $15.7 million.
NPRM.
Mass Amendments \1\............... Department of Labor: $0............................ $0............................ $0.
Final.
Department of Labor: $3.6 million.................. $3.6 million.................. $3.6 million.
NPRM.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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
-----------------------------------------------------------------------------
2020-02 75-1 77-4 80-83 86-128 84-24
----------------------------------------------------------------------------------------------------------------
Retirement Plans.................. 765,124 765,124 277,390 6,312 1,000 1,722
Individual Retirement Account 67,781,000 ........... ........... ........... 210 500,000
owners...........................
Broker-Dealers.................... 1,920 1,920 ........... ........... ........... ...........
Discretionary Fiduciaries......... ........... ........... ........... ........... 251 ...........
Registered Investment Advisers.... 16,398 ........... ........... ........... ........... ...........
Pure Robo-Advisers................ 200 ........... ........... ........... ........... ...........
Insurance Companies............... 84 ........... ........... ........... ........... 358
Captive Insurance Agents and 1,577 ........... ........... ........... ........... 1,577
Brokers..........................
Insurance Producers............... ........... ........... ........... ........... ........... 86,410
Banks............................. ........... 2,025 ........... 25 ........... ...........
Mutual Fund Companies............. ........... ........... 812 ........... ........... ...........
Non-Bank Trustees................. 31 ........... ........... ........... ........... ...........
Investment Company Principal (\1\) ........... ........... ........... ........... 20
Underwriters.....................
Pension Consultants............... (\1\) ........... ........... ........... ........... 1,011
----------------------------------------------------------------------------------------------------------------
\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.
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 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32199]]

investment advice will be directly affected by the amendments,
particularly participants receiving one-time advice as to whether they
should roll over their retirement savings. These participants are
discussed in the section on IRA owners, below.
Similarly, plans receiving fiduciary investment advice 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
carve-out 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, 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.
---------------------------------------------------------------------------

\461\ Estimates based on 2021 Form 5500 data.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\462\ EBSA 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 x 7.5
percent of plans are new = 75 new plans. The number of new IRAs is
estimated as: 10,000 IRAs x 2.1 percent of IRAs are new = 210 new
IRAs.
---------------------------------------------------------------------------

For PTE 84-24, the Department estimates that 7.5 percent of plans
are new accounts or new financial advice relationships \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\
---------------------------------------------------------------------------

\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 x 7.5 percent of plans are new x 3 percent
of plans with relationships with insurance agents or pension
consultants = 1,722 plans.
---------------------------------------------------------------------------

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

[[Page 32200]]

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.
---------------------------------------------------------------------------

\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).
\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 x 37% = 265,932; 46,388 defined benefit
plans x 24.7% = 11,458.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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 x 7.5 percent of
plans are new x 11 percent of plans with broker-dealer relationships
= 6,312 new plans.
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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 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\
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\471\ Cerulli Associates, U.S. Retirement End-Investor 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/issue-briefs/2021/09/pew-survey-explores-consumer-trend-to-roll-over-workplace-savings-into-ira-plans.
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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\
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\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.
---------------------------------------------------------------------------

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 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.
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\476\ Rollovers from defined contribution plans are 49% adviser-
mediated rollovers into IRAs, 37% self-directed rollovers into IRAs,
and 14% plan-to-plan 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 x 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.
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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

[[Page 32201]]

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.
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\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.
\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/.
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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 ERISA-covered fixed annuity transactions
involving an Independent Producer providing advice to an investor.\483\
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\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-and-annuities-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 ERISA-covered 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 x 4 quarters) / 34%
as the percentage of fixed-indexed to all fixed-rate contracts] x
81% sold by Independent Producers x 49% sold using investment advice
x 80% ERISA-covered transactions{time} + {[(148,860 avg. contract
size / 95.6 billion in annual fixed-indexed sales) / 34% as the
percentage of fixed-indexed to all fixed-rate contracts] x 81% sold
by Independent Producers x 49% sold using investment advice x 80%
ERISA-covered transactions{time} / 2] [ap] 501,013, rounded to
500,000.
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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.
---------------------------------------------------------------------------

\484\ (10,000 managed IRAs x 2.1 percent of IRAs are new) [ap]
210 IRAs.
---------------------------------------------------------------------------

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 broker-dealers, registered investment advisers, and
insurance companies were not previously complying with PTE 2020-02 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\
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\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.
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Investment advisers registered with the SEC are generally larger
than State-registered investment advisers, both in staff and in
regulatory assets under management.\486\ For example, according

[[Page 32202]]

to one report, 64 percent of State-registered investment advisers
manage assets under $30 million while investment advisers must register
with the SEC if they manage assets of $110 million or more.\487\ In
addition, according to one survey of SEC-registered investment
advisers, about 47 percent of SEC-registered investment advisers
reported 11 to 50 employees.\488\ In contrast, an examination of State-
registered investment advisers reveals about 80 percent reported less
than two employees.\489\
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\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 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/wp-content/uploads/2018/05/2018-NASAA-IA-Report-Online.pdf.
\488\ Investment Adviser Association, 2019 Investment Management
Compliance Testing Survey, (June 18, 2019), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/about/190618_IMCTS_slides_after_webcast_edits.pdf.
\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.
---------------------------------------------------------------------------

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 dual-registered 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
SEC-registered investment advisers.
---------------------------------------------------------------------------

\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).
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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 of this analysis,
the Department considers 15,206 State-registered investment advisers.
---------------------------------------------------------------------------

\492\ Estimates are based on the SEC's FOCUS filings and Form
ADV filings.
---------------------------------------------------------------------------

In 2023, 55 percent of registered investment advisers provided
employer-sponsored retirement benefits consulting.\493\ Based on this
statistic, the Department estimates there to be approximately 16,598
registered investment advisers.\494\
---------------------------------------------------------------------------

\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) x 55%] = 16,598 registered
investment advisers.
---------------------------------------------------------------------------

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 robo-advisers.\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\
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\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) x
55%]-200 robo-advisers = 16,398 registered investment advisers.
---------------------------------------------------------------------------

The Department does not have data on how many of these firms
provide advice only to Retirement Investors that are plan participants,
plan beneficiaries, or IRA owners, rather than the workplace retirement
plans themselves. These firms are fiduciaries under the Advisers Act
and already operate under standards broadly similar to those required
by PTE 2020-02.\497\
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\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-aa49-c572f2ddb7e8/UploadedImages/resources/IAA-Staff-Analysis-Standards-of-Conduct-Rulemaking2.pdf.
---------------------------------------------------------------------------

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 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\
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\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.
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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, broker-dealers, technology firms, and asset managers,
adopting hybrid robo-advice systems.\502\ Hybrid robo-advisers can

[[Page 32203]]

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 robo-advice 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\
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\500\ Deloitte. ``The Expansion of Robo[hyphen]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 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-advisors-changed-investing-but-can-they-survive-independently-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-in-2022-research-finds-227476.
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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 robo-adviser 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 number of plans offering robo-
advice may signal that plans see robo-advice as a valuable tool for its
participants.
---------------------------------------------------------------------------

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

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 robo-advisers 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.
---------------------------------------------------------------------------

\510\ Facundo Abraham, Sergio L. Schmukler, & Jose Tessada,
Robo-advisors: Investing Through Machines, World Bank Research and
Policy Briefs 134881 (2019).
---------------------------------------------------------------------------

Broker-Dealers
The amendments will modify PTE 75-1 Parts III and IV such that
broker-dealers 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\
---------------------------------------------------------------------------

\511\ Estimates are based on the SEC's FOCUS filings and Form
ADV filings.
---------------------------------------------------------------------------

Not all broker-dealers perform services for employee benefit plans.
In 2023, 55 percent of registered investment advisers provided
employer-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\
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\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 x 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 x 55%) = 600 non-retail broker-dealers.
The estimated number of total broker-dealers is 1,919 (1,319 + 600).
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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.
---------------------------------------------------------------------------

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

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 broker-dealers that provide
services to

[[Page 32204]]

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\
---------------------------------------------------------------------------

\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 x 55% = 251 affected entities.
---------------------------------------------------------------------------

Insurance Companies and Non-Independent 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 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.
---------------------------------------------------------------------------

\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/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\519\ United States Census Bureau, 2014 SUSB Annual Data Tables
by Establishment Industry, (December 2016).
---------------------------------------------------------------------------

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
2022, the percentage remained constant around 48 percent.\521\
---------------------------------------------------------------------------

\520\ Insurance Information Institute, Life/Annuity Insurance
Income Statement, 2014-2018, https://www.iii.org/table-archive/222464/file.
\521\ Insurance Information Institute, Facts + Statistics: Life
Insurance, (2024), https://www.iii.org/fact-statistic/facts-statistics-life-insurance#Direct%20Premiums%20Written%20By%20Line,%20Life/Annuity%20Insurance,%202020-2022.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\522\ United States Census Bureau, 2021 SUSB Annual Data Tables
by Establishment Industry, (December 2023).
---------------------------------------------------------------------------

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 in-plan annuities, and 63 percent of insurers thought
the SECURE Act would lead to a significant increase in the number of
plan participants allocating a portion of their plan balances to an
annuity option.\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.
---------------------------------------------------------------------------

\523\ Cerulli Associates, U.S. Annuity Markets 2021: Acclimating
to Industry Trends and Changing Demand, Exhibit 1.06. The Cerulli
Report.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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/financial-services/our-insights/unbundling-value-how-leading-insurers-identify-competitive-advantage; Sheryl Moore, The Annuity Model Is Broken, Wink Intel
(June 2022), https://www.winkintel.com/2022/06/the-annuity-model-is-broken-reprint/; 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-insurance-and-annuities-distribution.

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

[[Page 32205]]

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.
---------------------------------------------------------------------------

\525\ This study considers sales by independent agents,
independent broker-dealers, national broker-dealers, 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-insurance-and-annuities-distribution.)
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\526\ Annuity sales are based on LIMRA, U.S. Individual Fixed
Annuity Sales Breakouts, 2022, https://www.limra.com/siteassets/
newsroom/fact-tank/sales-data/2022/q4/2022-ye_-fixed-breakout-
results.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 x 81% = 358 insurance
companies. The number of insurance companies using independent
distribution channels is estimated as 442-358 = 84 insurance
companies.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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 x
19% = 13 insurance companies. The number of small insurance
companies using a captive distribution channel is 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 x 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.-annuity-sales-post-another-record-year-in-2023/.
---------------------------------------------------------------------------

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

[[Page 32206]]

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\536\ Federal Insurance Deposit Corporation, Statistics at a
Glance--as of September 30, 2023, https://www.fdic.gov/analysis/quarterly-banking-profile/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.
---------------------------------------------------------------------------

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

[[Page 32207]]

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 fiduciary-banks 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, exchange-traded
funds, and variable annuities.\540\ Under such arrangements, bank
employees are limited to performing only clerical or ministerial
functions in connection with brokerage transactions. However, bank
employees may forward customer funds or securities and may describe, in
general terms, the types of investment vehicles available from the bank
and broker-dealer under the arrangement. Similar restrictions on bank
employees' referrals of insurance products and State-registered
investment advisers exist. The Department believes that, in most cases,
such referrals will not constitute fiduciary investment advice.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\541\ Comment letter received from the American Bankers
Association on the Notification of Proposed Class Exemption:
Improving Advice for Workers & Retirees, (August 2020).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

Non-Bank Trustees
In the proposal, the Department received several comments
concerning how the rulemaking would affect IRS-approved 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.
---------------------------------------------------------------------------

\543\ Internal Revenue Service, Nonbank Trustees Approved as of
October 1, 2022, (October 2022), https://www.irs.gov/pub/irs-tege/nonbank-trustee-list.pdf.

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[[Page 32208]]

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.

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 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, non-
Retirement Investors may have previously experienced lower prices and
higher returns resulting from timing errors of Retirement Investors due
to conflicted advice. As those conflicts are removed, those
transactions may not occur, leading to a transfer from non-Retirement
Investors to Retirement Investors. Moreover, it is possible that the
financial industry would 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 over-priced 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 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 direct-sold 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

[[Page 32209]]

uncertain how many Retirement Investors would have adopted the new
share class had it been permitted to go fully into effect.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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}
---------------------------------------------------------------------------

\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.1540-6261.2012.01798.x.
\550\ The performance reduction presented in Christoffersen,
Evans and Musto (2013) does not include loads paid by investors in
front-end-load funds.
---------------------------------------------------------------------------

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 use revenue
sharing or sub-accounting fees. In an unbundled or ``clean'' share
class, the investor pays any intermediaries directly, while in a semi-
bundled share class, the fund pays sub-accounting fees for
recordkeeping services and uses revenue sharing for other services,
such as distribution.\551\
---------------------------------------------------------------------------

\551\ Ibid.
---------------------------------------------------------------------------

Adoption of these new share classes has spread quickly. Mitchell,
Sethi, and Szapiro (2019) found that between July 2018 to August 2019,
relatively few bundled share classes were launched into the market and
that more bundled share classes closed in that time frame than semi-
bundled and unbundled combined. Additionally, they found that unbundled
share classes received almost five times as much new money as semi-
bundled share classes. While flows to semi-bundled share classes
fluctuated, they received net positive flows overall during this
period.\552\
---------------------------------------------------------------------------

\552\ Ibid.
---------------------------------------------------------------------------

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, no-load 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

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

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 panic-selling during large and
abrupt downturns. However, conflicted advice providers may profit by
encouraging investors' natural inclination to trade more and ``chase
returns,'' an activity that tends to produce harmful timing
errors.\558\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32210]]

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\
---------------------------------------------------------------------------

\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-of-investors-to-time-purchases-and-sales-of-mutual-funds.pdf.
\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-sales-of-mutual-funds.pdf.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\561\ Panis & Padmanabhan, Buy Low, Sell High, 2023.
---------------------------------------------------------------------------

Evidence in Variable Annuities
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, and Tang (2022) showed that
variable annuity sales were four times more sensitive to brokers'
financial interests than to investors' financial interests.\564\
---------------------------------------------------------------------------

\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.
\564\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 risk-adjusted returns of investors by up
to 30 basis points per year, with two-thirds of the effect associated
with investors moving into lower-expense products and the remainder
from sales of annuities with more desirable investment options and
characteristics.\568\
---------------------------------------------------------------------------

\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 2022), https://academic.oup.com/rfs/article-abstract/35/12/5334/6674521.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.

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

[[Page 32211]]

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
common-law 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\
---------------------------------------------------------------------------

\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=msd12c734n8ddrct8uzqg0qut&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.
---------------------------------------------------------------------------

Summary
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.
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).

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32212]]

underscores that regulatory regimes that are not uniform allow advisers
to engage in regulatory arbitrage, leaving their clients vulnerable to
conflicts of interest.
---------------------------------------------------------------------------

\575\ Santosh Anagol, Shawn Cole & Shayak Sarkar, Understanding
the Advice of Commissions-Motivated Agents: Evidence from the Indian
Life Insurance Market, 99(1) The Review of Economics and Statistics
1-15, (2015), https://doi.org/10.1162/REST_a_00625.
---------------------------------------------------------------------------

This 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 robo-
advice.\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

Financial services firms are already moving toward new approaches
in how they offer advice, including more fee-based advice models,
flatter compensation models, and integrating technology. The 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.
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\
---------------------------------------------------------------------------

\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-profile-401k.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.
---------------------------------------------------------------------------

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 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 employer-sponsored plans they service,
which allows for automatic consolidation of certain IRA accounts with
modest balances into the saver's new employer-sponsored 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.
---------------------------------------------------------------------------

\579\ 89 FR 5624.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32213]]

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 commission-based 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 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\
---------------------------------------------------------------------------

\582\ Financial Industry Regulatory Authority, Annuities,
Financial Industry Regulatory Authority, https://www.finra.org/investors/investing/investment-products/annuities.

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 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.
---------------------------------------------------------------------------

\583\ Frank Fabozzi, The Handbook of Financial Instruments 579,
(2002), https://seekingworldlywisdom.files.wordpress.com/2011/08/the-handbook-of-financial-instruments-fabozzi.pdf.
\584\ Securities and Exchange Commission, Annuities, Securities
and Exchange Commission, https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
---------------------------------------------------------------------------

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 expenses-paid
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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

The Department also has concerns about sales tactics of insurance
agents, brokers, and Independent Producers for

[[Page 32214]]

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\
---------------------------------------------------------------------------

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

A number of State regulators have issued website alerts regarding
deceptive sales practices to sell annuities to seniors, including
``high-pressure sales pitch[es]'' and ``quick-change tactics'' in which
an agent tries to convince an investor to change coverage quickly
without time for adequate research. State regulators also warned that a
licensed agent will be more than willing to show credentials and to
question an agent's ``[unwillingness or inability] to prove
credibility'' to prospective customers.\589\ 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:
---------------------------------------------------------------------------

\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/annuities-and-senior-citizens; Georgia Office of the Commissioner of
Insurance and Safety Fire, Annuity Tips, Georgia Office of the
Commissioner of Insurance and Safety Fire, https://oci.georgia.gov/insurance-resources/annuity/annuity-tips; South Dakota Division of
Insurance, Consumer Alert: Annuities and Senior Citizens: Senior
Citizens Should Be Aware Of Deceptive Sales Practices When
Purchasing Annuities, South Dakota Division of Insurance, https://dlr.sd.gov/insurance/publications/alerts/documents/annuities_senior_citizens.pdf.
\590\ Minnesota Attorney General, Annuities: Unsuitable
Investments for Seniors, Minnesota Attorney General, https://www.ag.state.mn.us/consumer/Publications/AnnuitiesUnsuitableInvforSeniors.asp.

Some unscrupulous sellers use high-pressure sales pitches,
seminars, and telemarketing. Beware of agents who ``cold call'' you,
contact you repeatedly, offer ``limited time offers,'' show up
without an appointment, or won't meet with you if your family is
present. Beware of estate planning ``seminars'' that are actually
designed to sell annuities. Beware of seminars that offer free meals
or gifts. In the end, they are rarely free. Beware of agents who
give themselves fake titles to enhance their credibility.\591\
---------------------------------------------------------------------------

\591\ Ibid.

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

\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-for-federal-retirement-plan-rollover-fraud/ (September 2, 2022)
accessed February 13, 2024.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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.
\596\ The definition of 1035 exchange intensity, according to
Barbu, is the total amount of 1035 exchanges divided by total
assets.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 risk-
adjusted 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,

[[Page 32215]]

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.
---------------------------------------------------------------------------

\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/gj5skfflsip2nhee1662c/Draft.pdf?rlkey=msd12c734n8ddrct8uzqg0qut&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
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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 Sec. 224.4.
\603\ National Association for Fixed Annuities, 2016 State-by-
State Fixed Annuity Sales Study, (2017), https://nafa.com/online/library/2016-NAFA-Annual-Sales-Study.pdf.
\604\ For more information on this assumption, refer to the
Affected Entities section.
\605\ $3.8 trillion in assets x 70% of the assets not covered by
a fiduciary standard x 80% covered by ERISA x 0.25% increase in
returns = $5.3 billion.
---------------------------------------------------------------------------

The benefits of this rulemaking's application of fiduciary status
to investment advice from insurance agents, brokers, and Independent
Producers include eliminating the incentives for regulatory arbitrage
by those agents. Without this 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:
---------------------------------------------------------------------------

\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-indexed-annuities.
\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-about-annuities.
\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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-indexed-annuities.
---------------------------------------------------------------------------

FINRA also warns that indexed annuities may be able to change these
contractual limitations, depending on the terms of the contract.\610\
---------------------------------------------------------------------------

\610\ Id.
---------------------------------------------------------------------------

In a 2020 investor alert, the SEC warned, ``You can lose money
buying an indexed annuity. Read your contract carefully to understand
how your annuity works.'' \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:
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

``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\
---------------------------------------------------------------------------

\612\ Id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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-annuity-japan-vs-us-markets.ashx.

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

[[Page 32216]]

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 volatility-targeting 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\
---------------------------------------------------------------------------

\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-indexes-what-does-it-mean-for-you-as-an-annuity-holder-and-advisor/#What%20Are%20Risk-Controlled%20Indexes.
\615\ Ibid.
---------------------------------------------------------------------------

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
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\
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\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.
\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.
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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 broker-dealer 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 funds.'' \620\ The
rulemaking aims to reduce or eliminate such harmful favoritism.
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\619\ Advice provided by an investment adviser to a plan
fiduciary is subject to the Advisers Act fiduciary duty.
\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.
---------------------------------------------------------------------------

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\
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\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/about-ebsa/our-activities/resource-center/advisory-opinions/2013-03a.
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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.
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\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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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

[[Page 32217]]

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\
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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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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-99b1-5fd43782b0c4%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/rep627-published-26-august-2019.pdf.
---------------------------------------------------------------------------

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 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 one-time 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 that good advice can improve saving and investing
decisions. Accordingly, the rulemaking may result in a beneficial
reallocation of investment capital. Montmarquette and Viennot-Briot
(2015) provided evidence that ``having a financial advisor for at least
four years has a positive and significant impact on financial assets''
and that ``the positive effect of advice on wealth creation cannot be
explained by asset performance alone: the greater savings discipline
acquired through advice plays the major role.'' \628\
---------------------------------------------------------------------------

\628\ Claude Montmarquette & Nathalie Viennot-Briot, The Value
of Financial Advice, 16(1) Annals of Economics and Finance 69-94
(2015), https://aeconf.com/articles/may2015/aef160104.pdf.
---------------------------------------------------------------------------

Fisch et al. (2016) also provided evidence that ``highlight[s] the
potential value of professional advice in mitigating the effects of
financial illiteracy in retirement planning.'' \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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32218]]

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 tax-advantaged retirement
plans. For advice interactions not currently covered by relevant
standards of conduct, such as much advice provided to plan fiduciaries,
these enforcement measures will help to ensure the 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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, 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.
---------------------------------------------------------------------------

\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'').
---------------------------------------------------------------------------

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 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\

[[Page 32219]]

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.
---------------------------------------------------------------------------

\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-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\638\ Cain, Daylian M., George Loewenstein, and Don A. Moore.
``The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts
of Interest.'' Journal of Legal Studies 34 (2005): 1-25.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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-a-pension.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/iig-transformation/has/2023/pdf/has-insights/how-america-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-wp-offload-media.s3.amazonaws.com/faculty/wp-content/uploads/sites/27/2023/08/JPEF-20230802.pdf. James Choi, David Laibson, Brigette
Madrian, & Andrew Metrick, For Better or For Worse: Default Effects
and 401(k) Savings Behavior, In Wise DA (ed.), Perspectives on the
Economics of Aging. Chicago: University of Chicago Press, pp. 81-
121.
---------------------------------------------------------------------------

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
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 self-selected, 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.
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\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).
---------------------------------------------------------------------------

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 median incomes increased modestly
between 2019 and 2022.\645\
---------------------------------------------------------------------------

\645\ Tabulations from the 2019 and 2022 Survey of Consumer
Finances.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\646\ CFP Board of Standards, Access to Financial Advice Survey,
(Mar. 2024). 2024-access-to-financial-advice-report.pdf (cfp.net).
---------------------------------------------------------------------------

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,

[[Page 32220]]

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, fee-based 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
commission-based 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\
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\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-of-Individual-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:medi
an;range:1989,2022.
---------------------------------------------------------------------------

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 moderate-income clients. The CFP Board also has seen no
evidence to suggest that the proposed rule would restrict access to
advice, particularly for moderate-income 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.''
---------------------------------------------------------------------------

\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-and-Research/2024-Access-to-Financial-Advice-Report.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-cfp-professionals-with-most-ever-exam-takers-in-a-single-year. Last
accessed 3/7/2023.
---------------------------------------------------------------------------

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 broker-dealers had not made changes to their
handling of smaller, retail retirement accounts, although about 18
percent had raised their minimum account threshold and closed smaller
accounts.\652\ In examining the effects of the 2016 Final Rule, Egan,
Ge, and Tang (2022) found that while variable annuity sales had
decreased, there is no evidence that the change affected investors with
less wealth more than others. They concluded that variable annuity
sales had become more sensitive to expenses and that insurers had
increased the relative availability of low-expense products. Therefore,
the study concluded that investor welfare had improved overall because
of the 2016 Rulemaking, despite the fact that it was vacated.\653\
---------------------------------------------------------------------------

\652\ John Crabb, The Fiduciary Rule Poll, International
Financial Law Review, International Finance Law Review (October
2017), https://media2.mofo.com/documents/171000-fiduciary-rule-poll.pdf.
\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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

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

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.

[[Page 32221]]

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.
---------------------------------------------------------------------------

\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-shares-popularity/&cid=46591.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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-best-ways-for-smaller-investors-to-get-advice.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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-financial-advice.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/fs16-02.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.
---------------------------------------------------------------------------

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 computer algorithm, robo-adviser services generally can be
expanded more easily than traditional advisory services. The marginal
cost incurred by a robo-adviser to serve additional customers is very
small relative to that incurred by traditional advisers. Robo-advisers
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.
---------------------------------------------------------------------------

\663\ Michael Wong, Financial Services: Weighing the Strategic
Tradeoffs of the Fiduciary Rule, Morningstar (February 2017),
https://www.morningstar.com/articles/798573/financial-services-weighing-the-strategic-tradeoffs-of-the-fiduciary-rule.
\664\ Wealthfront, Account Minimums to Invest with Wealthfront,
Wealthfront, https://support.wealthfront.com/hc/en-us/articles/210994423--Account-minimums-to-invest-with-Wealthfront.
\665\ One example is Betterment. See Betterment, Pricing at
Betterment, Betterment, https://www.betterment.com/pricing/.
---------------------------------------------------------------------------

Many robo-advice providers claim to offer relatively conflict-free
services, claiming no commission, no performance fees, and no
compensation from third parties. Others claim to serve investors as
fiduciaries. Robo-adviser offerings are typically comprised of ETFs
that, in comparison to mutual funds, offer little room for revenue
streams and payment shares that would create the traditional conflicts
of interest for advisers discussed elsewhere in this analysis (e.g.,
12b-1 fees or subtransfer agent fees).\666\
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

\667\ Millson, Adam, U.S. Model Portfolio Landscape: 2023 in
Review, Morningstar Manager Research (February 2024).
---------------------------------------------------------------------------

A recent study by Liu et al. (2021) looked specifically at the
impact of using robo-advisers on investment

[[Page 32222]]

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.
---------------------------------------------------------------------------

\668\ Che-Wei Liu, Mochen Yang, & Ming-Hui Wen, Judge Me on My
Losers: Does Adaptive Robo-Advisors Outperform Human Investors
During the COVID-19 Financial Market Crash? Production and
Operations Management Forthcoming, (Accessed Aug. 31, 2023), https://doi.org/10.1111/poms.14029.
---------------------------------------------------------------------------

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 under-diversified improved their diversification and
experienced better portfolio performance through robo-advice. 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

While the Department does recognize that robo-advice is not a
completely conflict-free solution to providing low-cost, 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 robo-advice.\671\ With the same fiduciary
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.
---------------------------------------------------------------------------

\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-still-the-answer-to-costly-advice-or-a-dying-breed.
\671\ Morningstar, ``2023 Robo-Advice Landscape.'' (August
2023). https://institutional.vanguard.com/content/dam/inst/iig-transformation/insights/pdf/Robo-Advisor_Landscape_2023-Vanguard.pdf.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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
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.
---------------------------------------------------------------------------

\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/fls-2022-consumer-investments-financial-advice.pdf.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.

[[Page 32223]]

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..................... $248,063,209 $165,502,919
PTE 84-24....................... 288,737,197 167,239,823
Mass Amendment \1\.............. 0 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\
---------------------------------------------------------------------------

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

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
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 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 broker-dealers.\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\
---------------------------------------------------------------------------

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

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

[[Page 32224]]

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.
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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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) x (86% are internet fluent) =
72% are internet fluent and find electronic delivery acceptable.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\681\ United States Postal Service, First-Class Mail, United
States Postal Service (2023), https://www.usps.com/ship/first-class-mail.htm.
---------------------------------------------------------------------------

Additionally, the Department assumes that several types of
personnel 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\
---------------------------------------------------------------------------

\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-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
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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 attorneys, legal support
staff, and other professionals and in-house and out-sourced
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\
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\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-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
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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

[[Page 32225]]

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. 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\
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\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.
---------------------------------------------------------------------------

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 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\
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\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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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

[[Page 32226]]

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\
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\687\ The burden for rule review and planning is estimated as:
(18,632 entities x 20 hours) [ap] 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 x 20 hours) x $165.71
[ap] $61,751,119.
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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:

(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 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 broker-dealers, 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 approximately $0.5 million in the
first year.\688\
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\688\ The number of financial entities needing to update their
written acknowledgement is estimated as: (1,920 broker-dealers x 10%
x (100% - 30%)) + (8,035 SEC-registered investment advisers x 10% x
(100% - 30%)) + (8,363 State-registered investment advisers x 10% x
(100% - 30%)) + (84 insurers x 10% x (100% - 30%)) [ap] 1,288
Financial Institutions updating existing disclosures. The number of
financial entities needing to draft their written acknowledgement is
estimated as: 200 robo-advisers + 31 non-bank trustees + (1,920
broker-dealers x 30%) + (8,035 SEC-registered investment advisers x
30%) + (8,363 State-registered investment advisers x 30%) + (84
insurers x 30%) [ap] 5,751 Financial Institutions drafting new
disclosures. The burden is estimated as: (1,288 Financial
Institutions x (10 minutes / 60 minutes)) + (5,751 Financial
Institutions x (30 minutes / 60 minutes) [ap] 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 x $165.71
[ap] $512,106. Note: Due to rounding values may not sum.
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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 broker-dealers, 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 broker-dealers, 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\
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\689\ As discussed in the Regulatory Flexibility Act analysis,
the Department estimates that 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.
\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 SEC-registered investment advisers
+ 8,363 State-registered investment advisers) x (100% - 30%)) [ap]
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 robo-advisers
+ 31 non-bank trustees) + ((600 non-retail broker-dealers + 8,035
SEC-registered investment advisers + 8,363 State-registered
investment advisers) x 30%) [ap] 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 x (30 minutes / 60 minutes)) + ((976 small entities
drafting x 1 hour) + (4,354 entities drafting x 5 hours)) [ap]
28,738 burden hours. The labor rate is applied as: 28,738 burden
hours x $165.71 [ap] $4,762,239. Note: Due to rounding values may
not sum.

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[[Page 32227]]

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.
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\
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\691\ Form CRS Relationship Summary; Amendments to Form ADV, 84
FR 33492 (July 12, 2019), 17 CFR 240.15l-1(a)(2)(i).
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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 broker-
dealer 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\
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\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 broker-dealers 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 broker-dealers +
16,398 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(84 insurers + 200 robo-advisers + 31 non-bank trustees) x 1
hour] [ap] 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 x $165.71 [ap] $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\
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\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-plan-bulletins-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 x 38.8% [ap] 44,593,228.
\697\ In 2023, there were 67,781,000 IRAs. (See Cerulli, The
Cerulli Report, U.S. Retirement End-Investor 2023, Exhibit 5.12,
(2023)).
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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\
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\698\ The number of plan participants receiving paper
disclosures is estimated as: (44,593,228 plan participants receiving
investment advice x 3.9%) [ap] 1,739,136 paper disclosures.
\699\ The cost is estimated as: (1,739,136 paper disclosures x 2
pages) x $0.05 [ap] $173,914.
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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
disclosures would require two additional pages, resulting in a material
cost estimate of $1.9 million.\701\
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\700\ This is estimated as: 67,781,000 IRA owners x 28.2% [ap]
19,114,242 paper disclosures.
\701\ The cost is estimated as: (19,114,242 paper disclosures x
2 pages) x $0.05 [ap] $1,911,424.
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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\
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\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) [ap] $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.
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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\
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\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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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

[[Page 32228]]

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\
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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).
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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\
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\706\ The burden is estimated as: (4,485,059 rollovers x 49%
advisor assisted x 48% not already documenting x (30 minutes / 60
minutes)) + (4,485,059 rollovers x 49% advisor assisted x 52%
already documenting x (5 minutes / 60 minutes)) [ap] 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 x $228 [ap] $141,970,058. Note, the total values may
not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

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\
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\707\ The number of disclosures mailed is estimated as:
4,485,059 rollovers x 49% advisor assisted x 3.9% disclosures sent
by mail [ap] 85,709 disclosures. The material and postage cost is
estimated as: 85,709 disclosures mailed x $0.05 per page x 2 pages
[ap] $8,571. Note, the total values may not equal the sum of the
parts due to rounding.
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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 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.
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\708\ Total cost is estimated as: $8,571 materials and postage
cost + $141,970,058 to produce the disclosures [ap] $141,978,629.
Note, the total values may not equal the sum of the parts due to
rounding.
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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 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.
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\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/rules-guidance/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).)
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\713\ 2018 Investment Management Compliance Testing Survey,
Investment Adviser Association (Jun. 14, 2018), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/2018-Investment-Management_Compliance-Testing-Survey-Results-Webcast_pptx.pdf.
---------------------------------------------------------------------------

The Department assumes that 10 percent of robo-advisers, non-bank
trustees, 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 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

[[Page 32229]]

are small.\715\ The Department received no comments on this assumption.
---------------------------------------------------------------------------

\714\ This is estimated as: {[(1,920 broker-dealers + [(8,035
SEC-registered investment advisers + 8,363 State-registered
investment advisers) x 8%] + 84 insurers) x 30% that are newly
relying on PTE 2020-02] + (200 robo-advisers + 31 non-bank
trustees){time} x 10% [ap] 123 Financial Institutions. Note: Due to
rounding values may not sum.
\715\ This is estimated as: {[(1,920 broker-dealers + 84
insurers + 8,035 SEC-registered investment advisers + 8,363 State-
registered investment advisers) x 30% that are newly relying on PTE
2020-02] + (200 robo-advisers + 31 non-bank trustees){time} -
({[(1,920 broker-dealers + [(8,035 SEC-registered investment
advisers + 8,363 State-registered investment advisers) x 8%] + 84
insurers) x 30% that are newly relying on PTE 2020-02] + (200 robo-
advisers + 31 non-bank trustees){time} x 90%) =5,629 Financial
Institutions. Note: Due to rounding values may not sum.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\716\ The burden is estimated as: (26 small Financial
Institutions x 5 hours) + [(96 large Financial Institutions) x 10
hours] [ap] 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 x 5 hours) + [(96
large Financial Institutions) x 10 hours]{time} x $165.71 [ap]
$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 x 1 hours) + [(4,567 large Financial Institutions) x 2
hours] [ap] 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 x 1 hours) +
[(4,567 large Financial Institutions) x 2 hours]{time} x $165.71
[ap] $1,689,582. Note, the total values may not equal the sum of the
parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\718\ The burden is estimated as: (1,088 small Financial
Institutions x 2 hours) + [(4,663 large Financial Institutions) x 4
hours] [ap] 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 x $198.25 [ap] $4,129,476 Note, the
total values may not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

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 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 non-retail 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 SEC-registered 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) x 30% newly reliant on the PTE x 10
hours] + {[(1,017 large retail broker-dealers + 129 small non-retail
broker-dealers + 4,859 large SEC-registered 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 advisers + 71 small insurers) x 30%
newly reliant on the PTE] + (10 small robo-adviser + 31 non-bank
trustees) x 20 hours{time} + {[(471 large non-retail broker-dealers
+ 13 large insurers) x 30% newly reliant on the PTE] + 190 large
robo-advisers) x 40 hours]{time} [ap] 111,864 hours. The labor rate
is applied in the following calculation: 111,864 burden hours x
$165.71 [ap] $18,536,977. Note, the total values may not equal the
sum of the parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\721\ The burden is estimated as follows: The first-year cost of
updating policies and procedures for plans that currently have
policies and procedures: [(302 small retail broker-dealers + 85
small SEC-registered 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) x 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
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 advisers +
71 small insurers) x 30% newly reliant on the PTE] + (10 small robo-
adviser + 30 small non-bank trustees) + [(471 large non-retail
broker-dealers + 13 large insurers) x 70% already reliant on the
PTE] + (190 large robo-advisers + 1 large non-bank trustees) [ap]
13,112 entities. The burden estimate is calculated as: 13,112 x 5
hours [ap] 65,559 hours. The labor rate is applied in the following
calculation: 65,559 hours x $165.71 [ap] $10,863,864. In subsequent
years the cost of updating is calculated as: (All 18,632 affected
entities x 5 hours) [ap] 93,161 burden hours. The labor rate is
applied in the following calculation: 93,161 burden hours x $165.71
burden hours = $15,437,780. Note, the total values may not equal the
sum of the parts due to rounding.
---------------------------------------------------------------------------

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

[[Page 32230]]

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.
---------------------------------------------------------------------------

\722\ The burden is estimated as: (165 x (15 minutes / 60
minutes)) [ap] 41 hours. A labor rate of $65.99 is used for a
clerical worker. The labor rate is applied in the following
calculation: (165 x (15 minutes / 60 minutes)) x $65.99 [ap] $2,722.
Note, the total values may not equal the sum of the parts due to
rounding.
\723\ The burden is estimated as: (50 x (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
x (15 minutes / 60 minutes)) x $65.99 [ap] $825. Note, the total
values may not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

This results in a total cost of $29.4 million in the first year and
$15.4 million in subsequent years.\724\
---------------------------------------------------------------------------

\724\ The cost in the first year is estimated as: ($18,536,977 +
$10,863,864 + $2,722) [ap] $29,403,563. The cost in subsequent years
is estimated as: ($15,437,780 + $825) [ap] $15,438,605. Note, the
total values may not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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 insurance companies.\726\ Additionally,
the Department estimates that 1,727 plans will be affected by the
amendments.\727\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\728\ The burden is estimated as: (1,389 entities x 20 hours)
[ap] 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 x $165.71 [ap] $4,602,148.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\729\ The cost estimate for Independent Producers is estimated
as: 86,410 Independent Producers x 5 hours [ap] 432,050 burden
hours. The labor rate is applied in the following calculation:
(86,410 Independent Producers x 5 hours) x $165.29 [ap] $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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[[Page 32231]]

Costs Associated With Disclosures to Investors
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:

(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
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.
Costs Associated With the Written Fiduciary Acknowledgement
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\
---------------------------------------------------------------------------

\731\ The burden is estimated as: [(358 Financial Institutions +
4,320 Independent Producers) x (30 minutes / 60 minutes)] [ap] 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 x (30 minutes / 60 minutes)) x $165.71] +
[(4,320 Independent Producers x (30 minutes / 60 minutes)) x
$165.71] [ap] $386,657. Note, the total values may not equal the sum
of the parts due to rounding.
---------------------------------------------------------------------------

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 approximately $773,000 in the first year.\732\
---------------------------------------------------------------------------

\732\ This is estimated as: (4,320 Independent Producers + 358
insurance companies) x 1 hour [ap] 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 x 1 hour x
$165.29) + (358 insurance companies x 1 hour x $165.71) [ap]
$773,313. Note, the total values may not equal the sum of the parts
due to rounding.
---------------------------------------------------------------------------

Costs Associated With the Relationship and Conflict of Interest
Disclosure
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\
---------------------------------------------------------------------------

\733\ The burden is estimated as: [(85,541 small Independent
Producers x 3 hours) + (869 large Independent Producers x 5 hours)]
[ap] 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 x 3 hours) + (869
large Independent Producers x 5 hours)] x $165.71 [ap] $43,244,858.
Note, the total values may not equal the sum of the parts due to
rounding.

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[[Page 32232]]

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 estimated cost of
approximately $41.3 million annually.\735\
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\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.
\735\ The burden is estimated as: 500,000 rollovers x (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 x (30
minutes / 60 minutes)] x $165.29 = $41,322,500. Note, the total
values may not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 two-page disclosure and
prepare it for mailing, resulting in a cost of approximately $1.5
million annually.\740\
---------------------------------------------------------------------------

\737\ This is estimated as: (500,000 Retirement Investors x
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 x (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 x (2 minutes / 60
minutes)) x $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 x [$0.68 postage + ($0.05 per page x 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 x
28.2% sent by mail x (10 minutes / 60 minutes)) = 8,803 hours. A
labor rate of $165.29 is used for an insurance sales agent. The
labor rate is applied in the following calculation: (50,000
disclosures x 28.2% sent by mail x (10 minutes / 60 minutes)) x
$165.29 = $1,455,103. The material cost is estimated as: 14,100
rollovers resulting in a paper disclosure x [$0.68 postage + ($0.05
per page x 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32233]]

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\
---------------------------------------------------------------------------

\742\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201.
\743\ NAIC, Model Suitability Regulations, Sec. 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, Sec. 6(F)(1)(d) NAIC (2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201.;
NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC (2020).
\745\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201.
\746\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2020), https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

\749\ This is estimated as: (301 small insurance companies x 20
hours) + (57 large insurance companies x 40 hours) [ap] 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 x $165.71
[ap] $1,373,123. Note, the total values may not equal the sum of the
parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\750\ This is estimated as: 358 insurance companies x 5 hours
[ap] 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 x 5 hours) x $165.71 [ap]
$296,302. Note, the total values may not equal the sum of the parts
due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\751\ This is estimated as: (500,000 recommendations x (30
minutes / 60 minutes)) [ap] 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 x (30 minutes /
60 minutes)) x $198.25 [ap] $49,562,500. Note, the total values may
not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\752\ The number of requests in the first year is estimated as:
358 insurance companies x (165 requests in PTE 2020-02 /18,632
Financial Institutions in PTE 2020-02) [ap] 3 requests. The number
of requests in subsequent years is estimated as: 358 insurance
companies x (50 requests in PTE 2020-02 /18,632 Financial
Institutions in PTE 2020-02) [ap] 1 request.
\753\ The burden is estimated as: 3 requests x (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 x (15 minutes / 60 minutes)) x $65.99 = $49.49.
\754\ The burden is estimated as: 1 request x (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 x (15 minutes / 60 minutes)) x $65.99 = $16.50.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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 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.

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

[[Page 32234]]

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 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\
---------------------------------------------------------------------------

\756\ This is estimated as: 86,410 Independent Producers x 3
insurance companies covered [ap] 259,230 retrospective reviews.
\757\ This is estimated as: 259,230 retrospective reviews / 358
insurance companies [ap] 725 retrospective reviews, on average.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\758\ This is estimated as: 259,230 retrospective reviews x 1
hour [ap] 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 x 1 hour) x $165.71 [ap]
$42,957,003. Note, the total values may not equal the sum of the
parts due to rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\759\ This is estimated as: 358 firms x 4 hours [ap] 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 x $133.24 [ap] $190,594.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\760\ This is estimated as: 259,230 retrospective reviews x (5
minutes / 60 minutes) [ap] 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 x (5 minutes /
60 minutes)) x $65.99 [ap] $1,425,549. Note, the total values may
not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

The Department estimates that satisfying the requirements for
retrospective reviews will result in an estimated total annual cost of
approximately $44.6 million.\761\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 32235]]

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 self-correction 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\
---------------------------------------------------------------------------

\762\ The burden is estimated as: (500,000 transaction x 1% of
transactions resulting in self-correction x (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 x 1% of transactions resulting in
self-correction x (30 minutes / 60 minutes)) x $165.29 = $413,225.
Note, the total values may not equal the sum of the parts due to
rounding.
---------------------------------------------------------------------------

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 self-correction 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\
---------------------------------------------------------------------------

\763\ The Retrospective Review also requires a certification
that Form 5330 and any resulting excise taxes have been filed and
paid as appropriate.
---------------------------------------------------------------------------

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
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\
---------------------------------------------------------------------------

\764\ This is estimated as: (86,410 Independent Producers + 358
insurance companies) x 2 hours [ap] 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 x 2 hours x
$165.29) + (358 insurance companies x 2 hours x $165.71) [ap]
$28,683,939.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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
broker-dealers registered under the Securities Exchange Act of 1934. As
discussed in the Affected Entities section above, the Department
estimates that 1,919 broker-dealers and 2,025 banks will use PTE 75-
1.\766\
---------------------------------------------------------------------------

\766\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

Costs Associated With Disclosure Requirements in Part V
The Department 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.

[[Page 32236]]

The Department believes that it is a usual and customary business
practice to maintain records required for demonstrating compliance with
SEC-mandated 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

Costs Associated With Removing Fiduciary Investment Advice From Parts
III and IV
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.
Summary of Total Cost for the Amendments to PTE 75-1
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
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\
---------------------------------------------------------------------------

\768\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 80-83 allows banks to purchase, on behalf of employee benefit
plans, securities issued by a corporation indebted to the bank that is
a party in interest to the plan. The Department estimates that 25
fiduciary-banks with public offering services will be affected by the
amended PTE 80-83.\769\
---------------------------------------------------------------------------

\769\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 83-1 provides relief for the sale of certificates in an initial
issuance of certificates by the sponsor of a mortgage pool to a plan or
IRA when the sponsor, trustee, or insurer of the mortgage pool is a
fiduciary with respect to the plan or IRA assets invested in such
certificates.
Summary of Total Cost for the Amendments to PTE 77-4, PTE 80-83, and
PTE 83-1
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.
Costs Associated With Amendment to PTE 86-128
Summary of Affected Entities
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 exemption, of
which 210 are new IRAs.\770\
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\770\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

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

[[Page 32237]]

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 non-Title 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 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 robo-advice, 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 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

[[Page 32238]]

contract, the Department intends to avoid any potential disruption in
the market for investment advice.
---------------------------------------------------------------------------

\771\ See 81 FR 21002 (Apr. 8, 2016).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\772\ See FR 21927 (Apr. 20, 2015).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\773\ See FR 20946, 20950-51 (Apr. 8, 2016).
\774\ George Loewenstein, Daylian M. Cain & Sunita Sah, The
Limits of Transparency: Pitfalls and Potential of Disclosing
Conflicts of Interest, 101(3) American Economic Review 423-28, (May
2011).
---------------------------------------------------------------------------

Adding a Requirement for a Web Disclosure
The Department considered amending PTE 2020-02 and PTE 84-24 to
require Financial Institutions to disclosure the sources of third-party
compensation received in connection with recommended investment
products on a public web page 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 a
limited benefit to Retirement Investors. Due to these comments, the
Department decided against inclusion of a web disclosure exemption
condition at this time.
---------------------------------------------------------------------------

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

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\
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\776\ The burden is estimated as follows: (19,528 Financial
Institutions x 10 requests) x (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 x 10 requests) x (30 minutes / 60 minutes)] x
$165.71 = $15,368,343.
---------------------------------------------------------------------------

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

[[Page 32239]]

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.
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 section's ``substantially equivalent''
requirement.
---------------------------------------------------------------------------

\777\ 15 CFR 7.4.
---------------------------------------------------------------------------

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.

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.

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. Department of Labor, 200
Constitution Avenue NW, Room N-5718, Washington, DC 20210
By email: [email protected]

There is no paperwork burden associated with the 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.
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.
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.

[[Page 32240]]

Agency: Employee Benefits Security Administration, Department of
Labor.
Titles: PTE 86-128 (Securities Broker-Dealers).
OMB Control Number: 1210-0059.
Affected Public: Businesses or other for-profits; not for profit
institutions.
Estimated Number of Respondents: 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.

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.
---------------------------------------------------------------------------

\778\ 5 U.S.C. 601 et seq.
\779\ 5 U.S.C. 601(2), 603(a); see 5 U.S.C. 551.
---------------------------------------------------------------------------

1. Need for and Objectives of the Rule
As discussed earlier, the Department believes that changes to the
marketplace since 1975, when 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.
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
broker-dealers, 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

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

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 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 broker-dealers, 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

[[Page 32241]]

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.
---------------------------------------------------------------------------

\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-the-dols-fiduciary-proposal-will-increase-costs-and-reduce-access-to-retirement-planning-services.
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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 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.
---------------------------------------------------------------------------

\786\ According to Departmental Analysis of the Statistics of
U.S. Businesses by examining a weighted average of the receipts
attributable to small firms.
---------------------------------------------------------------------------

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 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.

[[Page 32242]]

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.
---------------------------------------------------------------------------

\787\ 13 CFR 121.201.
\788\ 15 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 Association, Count by NAICS Industry Sectors,
https://www.naics.com/business-lists/counts-by-naics-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-by-naics-code/.

Table 8--Affected Small Financial Entities
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prohibited transaction exemptions
-----------------------------------------------------------------------------------------------
2020-02 84-24 75-1 77-4 80-83 86-128
--------------------------------------------------------------------------------------------------------------------------------------------------------
Broker-Dealers.......................................... 1,862 .............. 1,862 .............. .............. ..............
Registered Investment Advisers.......................... 16,195 .............. .............. .............. .............. ..............
Pure Robo-Advisers.................................. 10 .............. .............. .............. .............. ..............
Discretionary Fiduciaries............................... .............. .............. .............. .............. .............. 243
Insurance Companies..................................... 71 261 .............. .............. .............. ..............
Insurance Producers..................................... .............. 85,564 .............. .............. .............. ..............
Banks................................................... .............. .............. 1,538 .............. 19 ..............
Mutual Fund Companies................................... .............. .............. .............. 728 .............. ..............
Investment Company Principal Underwriters............... (\1\) 20 .............. .............. .............. ..............
Nonbank Trustees........................................ 30 .............. .............. .............. .............. ..............
Pension Consultants..................................... (\1\) 924 .............. .............. .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 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 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 broker-dealers, 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.

[[Page 32243]]

Table 9--Share of Affected Small Entities by Revenue
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$100-$500 $0.5-$1 $25-$47 SBA small
Revenue <$100 Thousand Thousand Million $1-$5 Million $5-$25 Million Million SBA large \791\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Broker-Dealers.................................................. 16.6% 45.7% 17.6% 12.7% 3.7% 0.8% 3.0% 97.0%
Registered Investment Advisers.................................. 24.3 46.7 14.6 10.8 2.1 0.3 1.2 98.8
Pure Robo-Advisers.............................................. .............. .............. .............. .............. .............. .............. 95.0 5.0
Discretionary Fiduciaries....................................... 16.6 45.7 17.6 12.7 3.7 0.8 3.0 97.0
Insurance Companies............................................. .............. .............. .............. .............. .............. .............. 24.9 75.1
Insurance Producers............................................. 18.7 53.6 15.6 9.7 1.7 0.2 1.0 99.0
Mutual Fund Companies........................................... 27.1 29.2 8.3 18.1 10.1 2.1 10.4 89.6
Investment Company Principal Underwriters....................... .............. .............. .............. .............. .............. .............. 0.0 100.0
Pension Consultants............................................. 10.8 22.7 12.9 27.9 14.7 2.3 8.6 91.4
Nonbank Trustees................................................ 15.3 44.0 17.9 16.0 3.9 0.5 2.4 97.6
Banks \792\..................................................... 4.9 10.8 18.5 22.3 11.7 7.8 24.1 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.
---------------------------------------------------------------------------

\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.

Table 10--Calculated Number of Affected Small Entities by Revenue
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$100-$500 $0.5-$1 $25-$47 SBA small
Revenue <$100 Thousand Thousand Million $1-$5 Million $5-$25 Million Million SBA large \793\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Broker-Dealers.................................................. 318 877 337 244 71 16 58 1,862
Registered Investment Advisers.................................. 3,987 7,658 2,394 1,771 339 47 203 16,195
Pure Robo-Advisers.............................................. .............. .............. .............. .............. .............. .............. 190 10
Discretionary Fiduciaries....................................... 42 115 44 32 9 2 8 243
Insurance Companies............................................. .............. .............. .............. .............. .............. .............. 110 333
Insurance Producers............................................. 16,176 46,302 13,458 8,402 1,469 183 846 85,564
Mutual Fund Companies........................................... 220 237 68 147 82 17 84 728
Investment Company Principal Underwriters....................... .............. .............. .............. .............. .............. .............. 0 20
Pension Consultants............................................. 110 229 131 283 148 23 87 924
Nonbank Trustees................................................ 5 14 6 5 1 0 1 30
Banks \794\..................................................... 99 218 375 451 236 157 487 1,538
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Registered Investment Advisers
---------------------------------------------------------------------------

\793\ The total value may not equal the sum of the parts due to
rounding.
\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.
---------------------------------------------------------------------------

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 robo-advisers, including those registered
with the SEC and the State, will be affected by the amendments.\797\
---------------------------------------------------------------------------

\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-by-naics-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) x 98.7% = 16,185 small investment
advisers.
---------------------------------------------------------------------------

Robo-Advisers
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 robo-advisers will not be considered small. For the
purposes of this analysis, the Department assumes that 5 percent of
robo-advisers, or an estimated 10 robo-advisers, are small entities.
---------------------------------------------------------------------------

\798\ For more information on this estimate, refer to the
Affected Entities section of the regulatory impact analysis.
---------------------------------------------------------------------------

Broker-Dealers
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,

[[Page 32244]]

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
broker-dealers 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\
---------------------------------------------------------------------------

\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-by-naics-code/.
\801\ The number of retail broker-dealers affected by this
exemption is estimated as: (1,919 broker-dealers x 96.9%) = 1,860
broker-dealers.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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 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 x 55% = 251 affected entities.
---------------------------------------------------------------------------

Insurance Companies
The amendments to PTE 2020-02 and PTE 84-24 affect small insurance
companies and captive agents. 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 captive agents 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.
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.\804\
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 but has adopted this assumption due
to a lack of additional data.
---------------------------------------------------------------------------

\804\ This study considers sales by independent agents,
independent broker-dealers, national broker-dealers, 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-insurance-and-annuities-distribution.)
---------------------------------------------------------------------------

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 the highest annuity sales in
2022, one relied on captive distribution channels, seven relied on
independent distribution channels, and two relied on both.\805\
Accordingly, most insurance companies appear to primarily use either
independent distribution or a combination of captive and 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.
---------------------------------------------------------------------------

\805\ Annuity sales are based on LIMRA, U.S. Individual Fixed
Annuity Sales Breakouts, 2022, https://www.limra.com/siteassets/newsroom/fact-tank/sales-data/2022/q4/2022-ye-fixed-breakout-results.pdf. Information on distribution channels is based on review
of insurance company websites, SEC filings of publicly held firms,
and other publicly available sources.
---------------------------------------------------------------------------

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.\806\ Regarding entities affected by PTE 84-24, 73.1 percent, or
approximately 262 entities, are estimated to meet the SBA definition of
small entities. For entities affected by PTE 2020-02, the Department
continues to rely on the estimated number of small insurers developed
in the Affected Entities section of the regulatory impact analysis,
which is 71 small entities. This

[[Page 32245]]

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.
---------------------------------------------------------------------------

\806\ The number of insurance companies using captive
distribution channels is estimated as 442 x 81% = 358 insurance
companies. The number of insurance companies using independent
distribution channels is estimated as 442-358 = 84 insurance
companies.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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 x 99.0%) = 1,561 captive insurance agents
serving the annuity market.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\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-by-naics-code/.; Small Business
Administration, Table of Size Standards, (December 2022), https://www.sba.gov/document/support-table-size-standards.
---------------------------------------------------------------------------

Principal Company Underwriter
The Department expects that some investment company principal
underwriters for plans and IRAs rely on the existing PTE 84-24. The
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,

[[Page 32246]]

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.
---------------------------------------------------------------------------

\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 NAICS Industry Sectors, https://www.naics.com/business-lists/counts-by-naics-code/.
---------------------------------------------------------------------------

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 fiduciary-banks 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\
---------------------------------------------------------------------------

\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 x 76%) = 3,076 small banks.
\816\ The number of small banks that would use PTE 80-83 is
estimated as: (25 fiduciary-banks with public offering services x
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/bt-has-the-banking-industry-become-too-concentrated.pdf.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\818\ For more information on how the number of credit unions is
estimated, refer to the Affected Entities section of the regulatory
impact analysis.
\819\ 88 FR 18906 (March 29, 2023).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\820\ This is estimated on the percent of entities with annual
receipts less than $40 million for the industry Open End Investment
Fund, NAICS 525910. See NAICS Association, Count by NAICS Industry
Sectors, 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.
---------------------------------------------------------------------------

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 Per-entity cost
---------------------------------------------------------------
Subsequent Subsequent
First year years First year years
----------------------------------------------------------------------------------------------------------------
PTE 84-24....................................... $201,839,804 $82,820,265 $2,326 $954
PTE 2020-02..................................... 126,887,617 57,891,821 6,984 3,186
Mass Amendments \1\
---------------------------------------------------------------
Total....................................... 328,727,421 140,712,086 9,310 4,140
----------------------------------------------------------------------------------------------------------------
\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.

[[Page 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.
---------------------------------------------------------------------------

\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) x (86% are internet fluent) =
72% are internet fluent and find electronic delivery acceptable.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.

Table 12--Total Three-Year Average Per-Entity Cost by Entity and Revenue, Share of Revenue \825\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Independent Pension Robo adviser Nonbank
Revenue producer (%) consultant (%) Insurer (%) Broker (%) RIA \826\ (%) (%) trustee (%) Bank \827\ (%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
<$100k.......................................................... 3.16 6.63 .............. 5.62 4.91 .............. 7.34 <0.001
$100-$500k...................................................... 0.53 1.10 .............. 0.97 1.04 .............. 1.23 <0.001
$0.5-$1m........................................................ 0.21 0.44 .............. 41 61 .............. 0.50 <0.001
$1-$5m.......................................................... 0.05 0.11 .............. 0.12 0.29 .............. 0.14 <0.001
$5-$25m......................................................... 0.01 0.02 .............. 0.05 0.22 .............. 0.05 <0.001
$25-$47m........................................................ 0.00 0.01 .............. 0.04 0.17 .............. 0.05 <0.001
SBA Small....................................................... 0.01 0.01 0.28 0.01 0.01 0.11 0.01 <0.01
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost Associated With PTE 2020-02
---------------------------------------------------------------------------

\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 SEC-registered
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.
---------------------------------------------------------------------------

Summary of Affected Entities
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,

[[Page 32248]]

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.
---------------------------------------------------------------------------

\828\ The burden is estimated as: (18,169 entities x 20 hours)
[ap] 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 x 20 hours) x $165.71 [ap]
$60,215,805.
---------------------------------------------------------------------------

Cost Associated With General Disclosures
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\
---------------------------------------------------------------------------

\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 non-bank trustees) x 30% x (30
minutes / 60 minutes)] + (41 x (30 minutes / 60 minutes){time} [ap]
2,740 hours;
Previously reliant entities update fiduciary disclosure [(18,169
small entities-41 robo-advisor, and non-bank trustees) x 70% x 10% x
(10 minutes / 60 minutes)] [ap] 211 hours;
Previously reliant entities develop written statement of Care
and Loyalty Obligation disclosure [18,057 small entities x (30
minutes / 60 minutes)] [ap] 9,029 hours;
Newly reliant entities develop written statement of Care and
Loyalty Obligation disclosure (112 small entities x 1 hour) [ap] 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 x
(600 non-retail / 1,920 total broker-dealers)) x 30%] + [(41 robo-
advisor, and non-bank trustees) x 1 hour] [ap] 5,074 hours;
Previously reliant entities update All Material Facts disclosure
[(18,169 small entities-41 robo-advisor, and non-bank trustees-1,862
Broker-dealers) + (1,862 Broker-dealers x (600 non-retail / 1,920
total Broker-dealers)) x 70% x (30 minutes / 60 minutes)] [ap] 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 x $0.10) [ap] $574,609.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\830\ For more information on how the number of IRA rollovers is
estimated, refer to the Affected Entities section of the regulatory
impact analysis.
---------------------------------------------------------------------------

Building from the discussion above, the Department estimates an
annual cost of approximately $39.1 million for rollover transaction
documentation.\831\
---------------------------------------------------------------------------

\831\ The burden is estimated as: 2,197,679 rollovers x 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 x $64.60) + (605,564 small rollovers x
3.9% paper disclosures x $0.10)] = $39,121,801. For more information
on the assumptions included in this calculation, refer to the
regulatory impact analysis of this document.
---------------------------------------------------------------------------

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 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

[[Page 32249]]

cost in most years when no request is made.
---------------------------------------------------------------------------

\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 x 97.5%) = 161. The number of policies and
procedures requested from small financial entities in the first year
is estimated as: (50 x 97.5%) = 49.
\833\ The burden is estimated as: (161 x (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
x (15 minutes / 60 minutes)) x $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 x (15 minutes / 60
minutes)) [ap] 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 x (15 minutes / 60 minutes)) x $65.99 = $808. For
more information on the assumptions included in this calculation,
refer to the regulatory impact analysis of this document.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\835\ This burden in the first year is estimated as: [(5,250
small entities x 10 hours) + (229 small entities x 20 hours) +
(12,731 small entities x 5 hours)] [ap] 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 x 10 hours) +
(229 small entities x 20 hours) + (12,731 small entities x 5 hours)]
x $165.71 [ap] $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 x (15 minutes / 60 minutes)] x
$65.99 [ap] 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 x 5 hours) [ap] 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 x 5 hours) x $165.71 [ap] $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 x (15
minutes / 60 minutes)] x $65.99 [ap] $808. The total cost for the
second year is estimated as: $15,053,951 + $808 = $15,054,760.
---------------------------------------------------------------------------

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, robo-advisers, and newly
reliant broker-dealers, registered investment advisers, and insurance
companies, who either were not covered under, or not relying 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.
---------------------------------------------------------------------------

\836\ 2018 Investment Management Compliance Testing Survey,
Investment Adviser Association (Jun. 14, 2018), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/2018-Investment-Management_Compliance-Testing-Survey-Results-Webcast_pptx.pdf.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\837\ This is estimated as: {[(1,861 broker-dealers + 71
insurers) x 10%] + [(7,935 SEC-registered investment advisers +
8,260 State-registered investment advisers) x 0.8%] x 30% that are
newly relying on PTE 2020-02] + (10 robo-advisers + 31 non-bank
trustees) x 10%{time} [ap] 98 Financial Institutions. Note: Due to
rounding values may not sum.
\838\ This is estimated as: {[(1,861 broker-dealers + 71
insurers) x 90%] + [(7,935 SEC-registered investment advisers +
8,260 State-registered investment advisers) x 99.2%] x 30% that are
newly relying on PTE 2020-02] + (10 robo-advisers + 31 non-bank
trustees) x 90%{time} [ap] 5,479 Financial Institutions. Note: Due
to rounding values may not sum.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\839\ The burden is estimated as: (98 small entities creating an
audit x 5 hours) [ap] 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 x $165.71 [ap] $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 x 1 hours) [ap] 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 x $165.71 [ap] $886,983.
Note, the total values may not equal the sum of the parts due to
rounding.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\841\ The burden is estimated as: 5,479 newly reliant small
entities x 2 hours) [ap] 25,377 hours. A labor rate of $198.25 is
used for a financial manager. The labor rate is applied in the
following calculation: 10,958 burden hours x $198.25 [ap]
$2,172,432. Note, the total values may not equal the sum of the
parts due to rounding.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\842\ The burden in the first year is estimated as: $60,215,805
for rule review + $4,398,045 for disclosures + $39,121,801 for
rollover documentation + $20,008,658 for policies and procedures +
$8,171,727 for retrospective review = $131,918,693. The burden in
the subsequent years is estimated as: $574,609 for disclosures +
$39,121,801 for rollover documentation + $15,053,951 for policies
and procedures + $8,171,727 for retrospective review = $62,922,896.

[[Page 32250]]

Table 13--Three-Year Average Cost by Type of Entity and Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
SEC-registered State-registered
Broker-dealer investment investment Insurance Robo-adviser Non-bank
adviser adviser company trustee
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total.............................................. $2,057,340 $8,766,344 $9,124,980 $77,978 $11,047 $34,247
Per-Entity......................................... $1,105 $1,105 $1,105 $1,105 $1,105 $1,105
Disclosure:
Total.......................................... $101,864 $846,560 $881,193 $6,509 $8,143 $4,820
Per-Entity..................................... $55 $107 $107 $92 $814 $155
Rollover Documentation:
Total.......................................... $878,139 $18,493,989 $19,250,589 $2,048 $460,359 $36,678
Per-Entity..................................... $472 $2,331 $2,331 $29 $46,036 $1,183
Policies:
Total.......................................... $1,789,886 $7,232,234 $7,528,108 $76,028 $19,333 $59,932
Per-Entity..................................... $961 $911 $911 $1,077 $1,933 $1,933
Retrospective Review:
Total.......................................... $350,946 $1,351,008 $1,406,278 $13,309 $4,661 $14,449
Per-Entity..................................... $188 $170 $170 $189 $466 $466
Total:
Total.......................................... $5,178,174 $36,690,135 $38,191,149 $175,871 $503,542 $150,125
Per-Entity..................................... $2,781 $4,624 $4,624 $2,492 $50,354 $4,843
SBA:
SBA Threshold.................................. $47,000,000 $47,000,000 $47,000,000 $47,000,000 $47,000,000 $47,000,000
Per-Entity Cost as a Percentage of SBA
Threshold.....................................
0.006% 0.010% 0.010% 0.005% 0.107% 0.010%
--------------------------------------------------------------------------------------------------------------------------------------------------------

In response to comments, the Department has also conducted an
analysis of these per-entity costs as a share of a variety of different
entity sizes. This analysis for PTE 2020-02 is presented below in Table
14.

Table 14--Three-Year Average Per-Entity Cost of PTE 2020-02 by Entity and Revenue, Share of Revenue \843\
--------------------------------------------------------------------------------------------------------------------------------------------------------
SEC- State-
Revenue Insurance Broker-dealers registered registered Robo-advisers Nonbank
company (%) (%) RIA (%) RIA (%) (%) trustees (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
<$100k.................................................. .............. 4.66 4.91 4.91 .............. 7.34
$100-$500k.............................................. .............. 0.81 1.04 1.04 .............. 1.23
$0.5-$1m................................................ .............. 0.35 0.61 0.61 .............. 0.50
$1-$5m.................................................. .............. 0.10 0.29 0.29 .............. 0.14
$5-$25m................................................. .............. 0.04 0.22 0.22 .............. 0.05
$25-$47m................................................ .............. 0.04 0.17 0.17 .............. 0.05
SBA Small............................................... 0.01 0.01 0.01 0.01 0.11 0.01
--------------------------------------------------------------------------------------------------------------------------------------------------------

Cost Associated With PTE 84-24
Summary of Affected Entities
---------------------------------------------------------------------------

\843\ 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.
---------------------------------------------------------------------------

As discussed in the Affected Entities section of the regulatory
impact analysis, the Department expects that 86,769 small financial
entities will be affected by the amendments, including 924 pension
consultants, 20 investment company principal underwriters, 85,564
Independent Producers, and 261 insurance companies.\844\
---------------------------------------------------------------------------

\844\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

Cost To Review the Rule
The Department estimates that all 86,769 of the small Financial
Institutions affected will each need to review the rule and develop an
implementation plan, as it applies to their business. The Department
estimates that such a review and planning will take a legal
professional, on average, 20 hours for small insurers, pension
consultants, and mutual fund underwriters. The Department expects that
the majority of Independent Producers will receive support from the
carrier(s) they are contracted with or the Insurance Marketing
Organization in understanding the rulemaking and therefore 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, resulting in a total cost of
$74.7 million in the first year.\845\
---------------------------------------------------------------------------

\845\ The burden is estimated as: [(85,564 Independent Producers
x 5 hours) + (1,205 entities x 20 hours) [ap] 450,835 hours. A labor
rate of $165.71 is used for a legal professional and a labor rate of
$165.29 for an Independent Producer. The labor rate is applied in
the following calculation: [(85,564 Independent Producers x 5 hours
x $165.29) + (1,205 entities x 20 hours x $165.71)] [ap]
$74,707,970. Note: Due to rounding values may not sum.
---------------------------------------------------------------------------

Costs Associated With General Disclosures
The amendment requires small Independent Producers to provide
disclosures to Retirement Investors prior to, or at the time of, a
transaction covered by this exemption. For more information on the
requirement changes for each disclosure, refer to the descriptions in
the preamble and regulatory impact analysis of this

[[Page 32251]]

document. The Department estimates the marginal cost of the disclosure
requirements to be approximately $43.6 million in the first year for
the development of disclosures to meet the requirements of the
rulemaking.\846\
---------------------------------------------------------------------------

\846\ The burden is estimated as: Fiduciary Notice = For
Independent Producers: [(86,410 Independent Producers x 99%
proportion of entities are small Independent Producers x 5% assumed
to create disclosure) x (30 minutes / 60 minutes)] [ap] 2,139 hours.
Applying a labor rate for an Independent Producer results in: (2,139
hours x $165.29) [ap] $353,571. For insurers: 358 insurers x 73.1%
proportion of entities that are small x (30 minutes / 60 minutes)
[ap] 131 hours. Applying a labor rate for a legal professional
results in: (131 hours x $165.71) [ap] $21,652. Combining the costs
for both entity types yields: $353,571 + $21,052 [ap] 375,223 to
create the fiduciary notice.
Written Statement of Care Obligation & Loyalty Obligation = For
Independent Producers: [(86,410 Independent Producers x 99%
proportion of entities are small Independent Producers x 5% create
disclosure) x 1 hour] [ap] 4,278 hours. Applying a labor rate for an
Independent Producer results in: (4,278 hours x $165.29) [ap]
$707,142. For insurers: 358 insurers x 73.1% proportion of entities
that are small x 1 hour [ap] 261 hours. Applying a labor rate for a
legal professional results in: (261 hours x $165.71) [ap] $43,303.
Combining the costs for both entity types yields: $707,142 + $43,303
[ap] $750,445. Relationship and Conflict of Interest disclosure=
[(86,410 Independent Producers x 99% proportion of entities are
small Independent Producers) x 3 hours] [ap] 256,691 hours. Applying
a labor rate for legal professional results in: (256,691 hours x
$165.71) [ap] $42,536,316. Summing these components results in the
total estimated cost of: ($353,571 for Fiduciary Notice by
Independent producer + $21,652 for Fiduciary Notice by Insurer +
$707,142 for Statement of Care Obligation & Loyalty Obligation by
Independent Producer + $43,303 for Statement of Care Obligation &
Loyalty Obligation by Insurer + $42,536,316 for Relationship and
Conflict of Interest disclosures by Independent Producer) [ap]
$43,661,983.
---------------------------------------------------------------------------

Cost Associated With Rollover Documentation and Disclosure
The amendment requires an Independent Producer to provide a
rollover disclosure that is similar to the disclosure required in the
amended PTE 2020-02. As discussed in the regulatory impact analysis,
the Department assumes that such disclosures will be prepared by the
Independent Producer.
In the regulatory impact analysis, the Department estimates that
500,000 Retirement Investors will receive documentation of the basis
for recommending a rollover each year.\847\ The Department does not
have data on what proportion of rollovers will be produced by small
Independent Producers. For the purposes of this analysis, the
Department assumes that the proportion of rollovers advised by small
Independent Producers is equal to the share of revenue associated with
small Independent Producers compared to the revenue produced by all
Independent Producers. The Department estimates that approximately 48.7
percent of rollovers will be produced by small Independent
Producers.\848\ The Department estimates small Independent Producers
will need to provide approximately 243,600 rollover disclosures
annually. This results in an estimated cost of approximately $20.1
million annually.\849\
---------------------------------------------------------------------------

\847\ For information on this estimate, refer to the estimate of
IRAs affected by the amendments to PTE 84-24 in the Affected
Entities section of the regulatory impact analysis.
\848\ 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.
\849\ The burden is estimated as: [(500,000 rollovers x 48.7%
proportion of business activity associated with small entities) x
(30 minutes / 60 minutes)] [ap] 121,824 burden hours. A labor rate
of $165.29 is used for an Independent Producer. The labor rate is
applied in the following calculation: [(500,000 rollovers x 48.7%
proportion of business activity associated with small entities) x
(30 minutes / 60 minutes)] x $165.29 [ap] $20,136,349. For more
information on the assumptions included in this calculation, refer
to the regulatory impact analysis of this document.
---------------------------------------------------------------------------

Costs Associated With the Provision of Disclosures to Retirement
Investors
The Department estimates that the number of disclosures that will
need to be provided to Retirement Investors by small entities is equal
to the number of rollover disclosures, or approximately 243,600
disclosures. Preparing and sending the general disclosures described
above is estimated to cost of approximately $450,000.\850\
Additionally, as discussed in more detail in the Cost section of the
regulatory impact analysis, the Retirement Investor may request a
follow up disclosure which is intended to provide more detail on the
compensation associated with the potential transaction. The Department
estimates that 10 percent of Retirement Investors will request
additional information regarding the rollover and will need to be
provided this disclosure which is estimated to cost approximately
$714,000 to produce and provide.\851\
---------------------------------------------------------------------------

\850\ The labor cost is estimated as: [(500,000 disclosures x
28.2% sent by mail x 48.7% proportion of business activity
associated with small Independent Producers) x (2 minutes / 60
minutes)] [ap] 2,290 burden hours. A labor rate of $165.29 is used
for an insurance sales agent. The labor rate is applied in the
following calculation: [(500,000 disclosures x 28.2% sent by mail x
48.7% proportion of business activity associated with small
Independent Producers) x (2 minutes / 60 minutes)] x $165.29 [ap]
$378,563. The material cost is estimated as: 68,709 rollovers
resulting in a paper disclosure x [$0.68 postage + ($0.05 per page x
7 pages)] [ap] $70,770. The total cost is estimated as: $378,563 +
$70,770 [ap] $449,334. For more information on the assumptions
included in this calculation, refer to the regulatory impact
analysis of this document.
\851\ The labor cost is estimated as: (500,000 rollovers x 48.7%
proportion of business activity associated with small entities x 10%
request rate) [ap] 24,365 requests for the Detailed Compensation
Disclosure. Each disclosure is estimated to take 10 minutes to
prepare. Therefore, the hours burden is: 24,365 disclosure requests
x (10 minutes / 60 minutes) [ap] 4,061 burden hours. A labor rate of
$165.29 is used for an insurance sales agent. The labor rate is
applied in the following calculation: 4,061 burden hours x $165.29
[ap] $671,212. The mailing cost is estimated as: (24,365 requests x
28.2% receiving disclosures via mail) [ap] 6,871 rollovers resulting
in a paper disclosure x [$0.68 postage + ($0.05 per page x 2 pages)]
+ (2 minutes / 60 minutes) to prepare the disclosure for mailing x
$165.29 labor rate for an Insurance Sales Agent [ap] $43,216. The
total cost is estimated as: $671,212 + $43,216 [ap] $714,427. For
more information on the assumptions included in this calculation,
refer to the regulatory impact analysis of this document.
---------------------------------------------------------------------------

Additionally, Independent Producers will be required to send the
documentation to the insurance company for pre-transaction approval.
The Department expects that such documentation will be sent
electronically and result in a de minimis burden.
Costs Associated With the Retrospective Review
The amendment requires a retrospective review to be conducted at
least annually. The review must 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. Insurers will be required to
annually provide a written report that details the review to a Senior
Executive Officer for certification. Insurers will also be required to
provide the Independent Producer with the underlying methodology and
results of their retrospective review.
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

[[Page 32252]]

of Independent Producers and has revised them upward accordingly.
The Department estimates that Insurers will need to prepare a total
of 259,230 retrospective reviews.\852\ The Department does not have
data on the proportion of retrospective reviews that will be prepared
by small insurance companies. As presented in the Summary of Affected
Entities section of this RFA, the proportion of activity or cost
associated with small entities for entity level tasks is attributed by
the share of small entities in that industry. This results in an
estimate of approximately 189,428 retrospective reviews for small
insurance companies.\853\
---------------------------------------------------------------------------

\852\ For more information on this estimate, refer to the Cost
section of the regulatory impact analysis.
\853\ The number of retrospective reviews prepared by small
insurance companies is estimated as: [259,230 x (358 entities x
73.1% SBA small entities)] [ap] 189,428 retrospective reviews.
---------------------------------------------------------------------------

The Department assumes that the audit preparation will take one
hour of a legal professional's time, at a labor cost of $165.71 per
hour. Therefore, the cost to small insurers is estimated at
approximately $31.4 million annually.\854\ The certification of the
summary of the audits is expected to take a Senior Executive Officer,
at a labor cost of $133.24 per hour, an average of four hours per small
entity, which results in an estimated approximate cost of
$139,273.\855\ Finally, the Department estimates that it will take a
clerical professional, at a labor rate of $65.99 per hour, five minutes
per report to provide the results and methodology to Independent
Producers. This results in an estimated cost to small entities of
roughly $1 million.\856\ These communications are assumed to be
electronic therefore there are no postage or materials costs.
---------------------------------------------------------------------------

\854\ This burden is estimated as: (189,428 reviews by small
entities x 1 hour) [ap] 189,428 hours. A labor rate of $165.71 is
used for a legal professional. The labor rate is applied in the
following calculation: (189,428 reviews by small entities x 1 hour)
x $165.71 [ap] $31,390,045.
\855\ This burden is estimated as: (358 entities x 73.1% SBA
small entities) x 4 hours [ap] 1,045 hours burden. A labor rate of
$133.24 is used for a senior executive officer. The labor rate is
applied in the following calculation: (358 entities x 73.1% SBA
small entities x 4 hours) x $133.24 [ap] $139,273.
\856\ This burden is estimated as: 189,428 reviews by small
entities x (5 minutes / 60 minutes) [ap] 15,786 burden hours. A
labor rate of $65.99 is used for a clerical worker. The labor rate
is applied in the following calculation: [189,428 reviews by small
entities x (5 minutes / 60 minutes)] x $65.99[ap] $1,041,694.
---------------------------------------------------------------------------

The Department estimates that meeting the requirements of the
rulemaking, which include conducting and drafting the retrospective
review, having the review certified by a Senior Executive, and
providing feedback to Independent Producers to result in an annual cost
of approximately $32.6 million.\857\
---------------------------------------------------------------------------

\857\ This burden is the combination of: $31,390,045 to conduct
the review + $139,273 to review and certify the review + $1,041,694
to provide review results to Independent Producers [ap] $32,571,012.
---------------------------------------------------------------------------

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 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 1 percent of transactions
will result in self-correction. This results in 2,436 notifications of
self-corrections being sent from small Independent Producers. 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 $201,363.\858\
---------------------------------------------------------------------------

\858\ The burden is estimated as: [(500,000 transactions x 1% of
transactions resulting in self-correction x 48.7% proportion of
business activity associated with small Independent Producers) x (30
minutes / 60 minutes)] [ap] 1,218 hours. A labor rate of $165.29 is
used for an Independent Producer. The labor rate is applied in the
following calculation: [(500,000 transactions x 1% of transactions
resulting in self-correction x 48.7% proportion of business activity
associated with small Independent Producers) x (30 minutes/ 60
minutes)] x $165.29 [ap] $201,363.
---------------------------------------------------------------------------

Costs Associated With Policies and Procedures
The amendment requires Insurers to establish, maintain, and enforce
written policies and procedures for the review of each Independent
Producer's recommendation before an annuity is issued to a Retirement
Investor. The 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 Insurer, 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 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.
The Department estimates that drafting or modifying the policies
and procedures will cost approximately $0.9 million in the first year
\859\ and that the requirement to review policies and procedures
annually will cost approximately $217,000 in subsequent years for small
entities.\860\ The Department estimates that it will take the Insurer
approximately 30 minutes to review the Independent Producers rollover
recommendation and to provide feedback to the Independent Producer
resulting in an annual cost of $159,000.\861\ Providing policies and
procedures to the Department upon request is estimated to result in a
de minimis annual cost.\862\
---------------------------------------------------------------------------

\859\ This is estimated as: (358 insurers x 73.1% proportion of
small insurance companies x 20 hours) [ap] 5,226 hours. A labor rate
of $165.71 is used for a legal professional. The labor rate is
applied in the following calculation: (358 insurers x 73.1%
proportion of small insurance companies x 20 hours) x $165.71 [ap]
$866,069. For more information on the assumptions included in this
calculation, refer to the regulatory impact analysis of this
document.
\860\ This is estimated as: (358 insurers x 73.1% proportion of
small insurance companies x 5 hours) = 1,307 hours. A labor rate of
$165.71 is used for a legal professional. The labor rate is applied
in the following calculation: (358 insurers x 73.1% proportion of
small insurance companies x 5 hours) x $165.71 [ap] $216,517. For
more information on the assumptions included in this calculation,
refer to the regulatory impact analysis of this document.
\861\ This is estimated as: [(500,000 IRA rollover transactions
x 0.3% proportion of business activity associated with small
insurers) x (30 minutes / 60 minutes)] [ap] 802 burden hours. A
labor rate of $198.25 is used for a financial manager. The labor
rate is applied in the following calculation: [(500,000 IRA rollover
transactions x 0.3% proportion of business activity associated with
small insurers) x (30 minutes / 60 minutes)] x $198.25 [ap]
$158,969. The communication of the outcome is expected to be
provided electronically.
\862\ The number of requests in the first year is estimated as:
[(358 insurers x 73.1% proportion of insurance companies that are
small) / 87,799 affected entities] x (165 requests in PTE 2020-02
[ap] 3 requests. The number of requests in subsequent years is
estimated as: [(358 insurers x 73.1% proportion of small insurance
companies) / 87,799 affected entities] x 50 requests in PTE 2020-02
[ap] 1 request. The burden is estimated as: (3 requests x (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
calculations: Year one: (3 requests x (15 minutes / 60 minutes)) x
$65.99 [ap] $49. Subsequent years: (1 request x (15 minutes / 60
minutes)) x $65.99 [ap] = $17.

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

[[Page 32253]]

Costs Associated With the Recordkeeping
The 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
investment advice. The Department estimates that the additional time
needed to maintain records for the Financial Institutions to be
consistent with the exemption will require an insurance company and
Independent Producer two hours annually, resulting in an estimated
annual cost of $28.4 million.\863\
---------------------------------------------------------------------------

\863\ This is estimated as: (85,564 Independent Producers + 301
small insurance companies) x 2 hours = 171,650 hours. A labor rate
of $165.29 is used for an Independent Producer. A labor rate of
$165.71 is used for a legal professional. The labor rate is applied
in the following calculation: [(85,564 Independent Producers x 2
hours x $165.29) + (301 small insurance companies x 2 hours x
$165.71)] = $28,372,277.
---------------------------------------------------------------------------

Summary of Total Cost
The Department estimates that in order to meet the additional
conditions of the amended PTE 84-24, small, affected entities would
incur a total cost of $201.8 million in the first year and $82.8
million in subsequent years. The total and per-entity cost by type of
entity is broken down in the table below.

Table 15--Cost by Type of Small Entity and Requirement, First Year
----------------------------------------------------------------------------------------------------------------
Financial
Independent Pension institutions/ Mutual fund
producer consultants insurance underwriters
companies
----------------------------------------------------------------------------------------------------------------
Rule Review:
Total....................................... $70,714,175 $3,061,442 $866,069 $66,284
Per-Entity.................................. 826 3,314 3,314 3,314
Disclosure:
Total....................................... 64,897,138 .............. 65,955 ..............
Per-Entity.................................. 758 .............. 249 ..............
Policies and Procedures:
Total....................................... .............. .............. 1,025,087 ..............
Per-Entity.................................. .............. .............. 3,923 ..............
Retrospective Review:
Total....................................... .............. .............. 32,571,012 ..............
Per-Entity.................................. .............. .............. 124,640 ..............
Self-Correction:
Total....................................... 201,363 .............. .............. ..............
Per-Entity.................................. 2 .............. .............. ..............
Recordkeeping:
Total....................................... 28,285,670 .............. 86,607 ..............
Per-Entity.................................. 331 .............. 331 ..............
Total:
Total Cost.................................. 164,098,348 3,061,442 34,613,730 66,284
Per-Entity Cost............................. 1,918 3,314 132,457 3,314
SBA:
Threshold (in $ millions)................... 15.0 45.5 47.0 47.0
Per-Entity Cost as a Percentage of SBA 0.013% 0.007% 0.282% 0.007%
Threshold..................................
----------------------------------------------------------------------------------------------------------------

In response to comments, the Department has also conducted an
analysis of these per-entity costs as a share of a variety of different
entity sizes. This analysis for PTE 84-24 is presented below in Table
16.
---------------------------------------------------------------------------

\864\ 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.

Table 16--Three-Year Average Per-Entity Cost of PTE 84-24 by Entity and Revenue, Share of Revenue \864\
----------------------------------------------------------------------------------------------------------------
Investment
Independent Insurance Pension company
Revenue producer (%) company consultants principal
(%) underwriters
----------------------------------------------------------------------------------------------------------------
<$100k.......................................... 3.16 .............. 6.63 ..............
$100-$500k...................................... 0.53 .............. 1.10 ..............
$0.5-$1m........................................ 0.21 .............. 0.44 ..............
$1-$5m.......................................... 0.05 .............. 0.11 ..............
$5-$25m......................................... 0.01 .............. 0.02 ..............
$25-$47m........................................ 0.00 .............. 0.01 ..............
SBA Small....................................... 0.01 0.28 0.01 0.01
----------------------------------------------------------------------------------------------------------------

[[Page 32254]]

Costs Associated With the Mass Amendments
Cost Associated With PTE 75-1
Summary of Affected Entities
The amendment to PTE 75-1 will affect banks, reporting dealers, and
broker-dealers registered under the Security Exchange Act of 1934. As
discussed in the Affected Entities section above, the Department
estimates that 3,944 Financial Institutions, comprised of 1,919 broker-
dealers and 2,025 banks, would use PTE 75-1.\865\ The Department
estimates that, of these affected entities, 1,861 broker-dealers and
1,538 banks would be small.
---------------------------------------------------------------------------

\865\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities sections of the
regulatory impact analysis and the Regulatory Flexibility Analysis.
---------------------------------------------------------------------------

Costs Associated With Disclosure Requirements in Part V
The Department amended 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 certain conditions are
met.\866\ Prior to the extension of credit, the plan or IRA must
receive written a disclosure, including the interest rate or other fees
that will be charged on the credit extension as well as the method of
determining the balance upon which interest will be charged. As
discussed in the regulatory impact analysis, the Department expects
that these disclosures are common business practice and will not create
an additional burden on small broker-dealers or banks.
---------------------------------------------------------------------------

\866\ For more information on these conditions, refer to the
preamble and regulatory impact analysis of this document.
---------------------------------------------------------------------------

Costs Associated With Recordkeeping in Parts II and V
Additionally, the Department proposed to amend PTE 75-1 Parts II
and V to adjust the recordkeeping requirement to shift the burden from
plans and IRAs to Financial Institutions. For the final amendments,
this requirement was removed, so there is no added burden for
recordkeeping.
Costs Associated With Removing Fiduciary Investment Advice From Parts
III and IV
Finally, the Department amended Parts III and IV, which currently
provide 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. The
Department believes that since investment advice providers were already
required to provide records and documentation under PTE 2020-02, this
amendment will not result in additional costs.
Summary of Total Cost
The removal of investment advice from PTE 75-1 Parts III & IV moves
the estimated costs of providing investment advice to the cost
estimates for PTE 2020-02 and leaves other burdens unchanged. 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. In response to comments, the
Department has conducted an analysis of the remaining per-entity costs
as a share of a variety of different entity sizes.
Cost Associated With PTE 77-4, PTE 80-83, PTE 83-1, and PTE 86-128
Summary of Affected Entities
The amendment to PTE 77-4 will affect 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.\867\
---------------------------------------------------------------------------

\867\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 80-83 allows banks to purchase, on behalf of employee benefit
plans, securities issued by a corporation indebted to the bank that is
a party in interest to the plan. The Department estimates that 19 small
fiduciary-banks with public offering services will be affected by the
amended PTE 80-83.\868\
---------------------------------------------------------------------------

\868\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

6. Duplicate, Overlapping, or Relevant Federal Rules

The rules in ERISA and the Code that govern advice on the
investment of retirement assets overlap with SEC rules that govern the
conduct broker-dealers that advise retail investors and the fiduciary
duty imposed on investment advisers by the Advisers Act. The Department
considered conduct standards set by other regulators, such as SEC,
NAIC, and FINRA, in developing the final rule, with the goal of
avoiding overlapping or duplicative requirements. To the extent the
requirements overlap, compliance with the other disclosure or
recordkeeping requirements can be used to satisfy the exemption, as
long as the conditions are satisfied.

7. Description of Alternatives Considered

Section 604 of the RFA requires the Department to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entities. This
rulemaking involves predominantly small entities which required the
impact on small entities to be a primary concern. The Department tried
to align the requirements in this rulemaking with the requirements set
by other regulators to minimize regulatory burden.
Additionally, the Department has removed certain requirements in
the PTEs, resulting in a lower compliance cost for fiduciary advice
providers. For instance:
The Department removed the requirement of the right to
obtain specific information regarding costs, fees, and compensation.
Removing this requirement saved small entities $82.86 per-entity for
entities already relying on PTE 2020-02, and $165.71 per-entity for

[[Page 32255]]

entities newly reliant on PTE 2020-02 in the first year.\869\
---------------------------------------------------------------------------

\869\ The per-entity cost is estimated as: ($165.71 per hour x
0.5 hour) [ap] $82.86 and ($165.71 per hour x 1 hour) [ap] $165.71.
A labor rate of $165.71 is used for a legal professional.
---------------------------------------------------------------------------

In the proposal for PTE 2020-02, the Department considered
requiring a rollover disclosure for all rollovers but instead limited
the disclosure to rollovers from plans to IRAs in the final exemption.
The Department estimates that approximately 70 percent of rollovers are
plan-to-IRA rollovers.\870\ The Department estimates that small
Financial Institutions will no longer need to complete approximately
246,000 rollover disclosures due to this change.\871\ Removing this
requirement will save small entities $64.60 for each rollover they
conduct that is not between a plan and an IRA.\872\ Another $0.10 per
rollover will be saved for any of these transactions that are conducted
with paper disclosures.
---------------------------------------------------------------------------

\870\ As discussed in the Affected Entities section of the
regulatory impact analysis, the Department estimates that
approximately 6.4 million rollovers occur annually, of which 4.5
million are plan-to-IRA rollovers.
\871\ The number of plan-to-plan and IRA-to-IRA rollovers is
estimated as: 6.4 million total rollovers-4.5 million plan-to-IRA
rollovers = 1.9 million rollovers. The number of adviser
intermediated rollovers by small Financial Institutions is estimated
as: 1.9 million rollovers x 49 percent of rollovers adviser mediated
x 26.4 percent rollovers by small Financial Institutions = 245,784
rollovers.
\872\ The per-entity is estimated with a blended average of
firms already and newly documenting rollovers. Newly documenting
firms are assumed to have a burden of 0.5 hours, while already
documenting firms have a burden of 5 minutes. A labor rate of
$228.00 is used for a personal financial advisor. As discussed in
the Cost section of the regulatory impact analysis, the Department
estimates that 48% of firms already document rollovers, while 52% do
not. The per-rollover cost is estimated as ((48% x 30 minutes) x
$228.00) + ((52% x 5 minutes) x $228.00) = $64.60.
---------------------------------------------------------------------------

In the final PTE 2020-02, the Department has modified the
requirement for a written description of services to be more consistent
with the material facts disclosure required by Regulation Best
Interest. When it was separate, the description of services had a per-
entity cost ranging from $96.66 per small broker-dealer to $248.66 per
small Insurer in the first year.\873\ The Department believes that some
of these costs will be absorbed from the ability of small businesses to
comply with Regulation Best Interest and this rulemaking more easily
through the material facts disclosure.
---------------------------------------------------------------------------

\873\ The per-entity cost is estimated as: ($165.71 per hour x
35 minutes) [ap] $96.66 and ($165.71 per hour x 1.5 hours) [ap]
$248.66. A labor rate of $165.71 is used for a legal professional.
---------------------------------------------------------------------------

In PTE 84-24, the Department also removed a requirement to
provide a general disclosure on commissions received, instead allowing
this information to be provided to investors on request. This resulted
in a per entity saving for small entities of $165.71 in the first
year.\874\
---------------------------------------------------------------------------

\874\ The per-entity cost is estimated as: ($165.71 per hour x 1
hour) [ap] $165.71 [ap] $165.71. A labor rate of $165.71 is used for
a legal professional.
---------------------------------------------------------------------------

The Department considered not amending PTE 2020-02 and leaving the
exemption in its present form. The Department supports the existing PTE
2020-02 and has retained its core components in the amendment,
including the Impartial Conduct Standards and the requirement for
strong policies and procedures designed to mitigate conflicts of
interest and ensure compliance with the exemption conditions. However,
the Department believes that broadening the exemption to cover all
principal transactions and robo advice, as well as providing additional
protections are necessary to ensure that fiduciary investment advice
providers adhere to the protective standards outlined in PTE 2020-02.
Therefore, the amendments clarify and tighten the existing text of PTE
2020-02 to enhance the disclosure requirements and strengthen the
disqualification provisions while also broadening the scope of the
exemption so more parties can use it. For more information, refer to
the preamble to amended PTE 2020-02, also published in today's Federal
Register.
The Department has sought to, where appropriate, minimize the
burden of disclosure requirements in PTE 2020-02 and PTE 84-24. For
instance, in PTE 2020-02 and PTE 84-24, the Department has provided
model language that will satisfy more general disclosure requirements.
Additionally, based on comments received on the proposal, the
Department has made several adjustments to its disclosure requirements.
In the final amendments, the Department has changed the requirements to
provide a written description of services to be more consistent with
the disclosure requirement of all material facts required on Regulation
Best Interest for both PTE 2020-02 and PTE 84-24. As such, entries
already complying with Regulation Best Interest will already likely be
providing sufficient disclosure for this requirement.
For PTE 2020-02, several commenters expressed concern about the
burden and litigation risk associated with the ``right to obtain
specific information regarding costs, fees, and compensation'' for
Retirement Investors. At this time, the Department has decided to
remove this element and align the disclosure conditions with the
requirements of Regulation Best Interest, in order to provide a uniform
and cost-effective approach to disclosures. For PTE 84-24, Investment
Producers must still provide a notice of a Retirement Investor's right
to request additional information regarding cash compensation. The
Department considered requiring Independent Producers to produce this
information by default but instead decided to make this information
available by request to be similar to the obligations of an Independent
Producer under Section 6.A.2.a.v and 6.A.2.b of the NAIC Model
Regulation \875\ and requirements in the State of New York.\876\
---------------------------------------------------------------------------

\875\ NAIC Model Regulation Section 6.A.2.a.v. provides that
``[p]rior to the recommendation or sale of an annuity, the producer
shall prominently disclose to the consumer . . . (v) A notice of the
consumer's right to request additional information regarding cash
compensation described in Subparagraph (b) of this paragraph.''
Section 6.A.2.b states that ``[u]pon request of the consumer or the
consumer's designated representative, the producer shall disclose:
(i) A reasonable estimate of the amount of cash compensation to be
received by the producer, which may be stated as a range of amounts
or percentages; and (ii) Whether the cash compensation is a one-time
or multiple occurrence amount, and if a multiple occurrence amount,
the frequency and amount of the occurrence, which may be stated as a
range of amounts or percentages.''
\876\ Section 30.3(a)(4) of Rule 194 provides that ``an
insurance producer selling an insurance contract shall disclose the
following information to the purchaser: . . . (4) that the purchaser
may obtain information about the compensation expected to be
received by the producer based in whole or in part on the sale, and
the compensation expected to be received based in whole or in part
on any alternative quotes presented by the producer, by requesting
such information from the producer.'' If such a request is made,
Section 30.3(b) requires the producer to provide the following
information: ``(1) a description of the nature, amount, and source
of any compensation to be received . . . ; (2) a description of any
alternative quotes presented by the producer . . . ; (3) a
description of any material ownership interest the insurance
producer . . . has in the insurer . . . ; (4) a description of any
material ownership interest the insurer . . . has in the insurance
producer . . . ; and (5) a statement whether the insurance producer
is prohibited by law from altering the amount of compensation
received from the insurer based in whole or in part on the sale.''
---------------------------------------------------------------------------

The Department has considered requiring Financial Institutions to
disclose the sources of third-party compensation received in connection
with recommended investment products on a public web page in PTE 2020-
02. When considering this requirement, the Department discussed
exempting small Financial Institutions from this disclosure. In the
final rulemaking, the Department has decided to not include this
requirement.
Based on comments received in the proposal, the Department is
adding transition relief to PTEs 2020-02 and 84-24. The amended
exemptions both

[[Page 32256]]

have an Applicability Date 150 days (which adds 90 days to the proposed
60 days) after publication in the Federal Register. Financial
Institutions and Investment Professionals will have one year after the
Applicability Date before they are responsible for full compliance.
This transition relief is available for all sizes of Financial
Institutions that will rely on the exemptions; however, the additional
time to comply with the requirements will likely be particularly
beneficial for smaller entities with fewer resources to ensure
compliance.

P. Unfunded Mandate Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 \877\ (UMRA)
requires each Federal agency to prepare a written statement assessing
the effects of any Federal mandate in a proposed or final rule that may
result in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any one year by State, local, and
Tribal governments, in the aggregate, or by the private sector. That
threshold is approximately $183 million in 2024.
---------------------------------------------------------------------------

\877\ Unfunded Mandates Reform Act of 1995, Public Law 104-4,
109 Stat. 48, (1995).
---------------------------------------------------------------------------

For purposes of the Unfunded Mandates Reform Act, this rulemaking
is expected to have an impact on the private sector. For the purposes
of the rulemaking, the regulatory impact analysis shall meet the UMRA
obligations.

Q. Federalism Statement

Executive Order 13132 outlines the fundamental principles of
federalism. It also requires Federal agencies to adhere to specific
criteria in formulating and implementing policies that have
``substantial direct effects'' on the States, the relationship between
the National Government and States, or on the distribution of power and
responsibilities among the various levels of government. Federal
agencies promulgating regulations that have these federalism
implications must consult with State and local officials throughout the
process of developing the regulation.
As discussed throughout this analysis, this regulatory action would
affect the insurance industry pertaining to annuities. These entities
are also regulated by States, many of whom, as discussed in the
discussion of the regulatory baseline, have taken regulatory or
legislative actions. The Department has carefully considered the
regulatory landscape in the States and worked to ensure that its
regulations would not impose obligations on advisers or the insurance
industry that are inconsistent with their responsibilities under State
law, including the obligations imposed in States that based their laws
on the NAIC Model Regulation. Nor would these regulations impose
obligations or costs on the State regulators. As discussed above,
however, the Department has increased the protections afforded by many
of these laws, consistent with its own responsibilities under ERISA,
and has endeavored to lend greater uniformity on the provision of
advice to Retirement Investors, so that advisers covered by the rule
must all abide by a uniform fiduciary standard. The Department has had
discussions with State insurance regulators and State-regulated parties
about these issues including the need to ensure that Retirement
Investors have sufficient protection when receiving investment advice.
The Department does not intend these final rules 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 securities, banking,
or insurance laws. Ultimately, the Department does not believe this
final rule has federalism implications because it has no substantial
direct effect on the States, on the relationship between the National
government and the States, or on the distribution of power and
responsibilities among the various levels of government.
The Department intends to work with State insurance regulators as
we move forward with implementation to ensure that this regulation
complements the protections provided by the NAIC Model Regulation. The
Department also intends to continue to work with State securities
regulators.

Authority

This regulation is finalized pursuant to the authority in section
505 of ERISA (Pub. L. 93-406, 88 Stat. 894 (Sept. 2, 1974); 29 U.S.C.
1135) and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713
(Oct. 17, 1978)), 3 CFR, 1978 Comp. 332, effective December 31, 1978
(44 FR 1065 (Jan. 3, 1979)), 3 CFR, 1978 Comp. 332, 5 U.S.C. App. 237,
and under Secretary of Labor's Order No. 1-2011, 77 FR 1088 (Jan. 9,
2012).

List of Subjects in 29 CFR Part 2510

Employee benefit plans, Employee retirement income security act,
Pensions, Plan assets.

For the reasons set forth in the preamble, the Department amends
part 2510 of subchapter B of chapter XXV of title 29 of the Code of
Federal Regulations as follows:

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G,
AND L OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

Authority: 29 U.S.C. 1002(1)-(8), 1002(13)-(16), 1002(20),
1002(21), 1002(34), 1002(37), 1002(38), 1002(40)-(44), 1031, and
1135; Div. O, Title I, Sec. 101, Pub. L. 116-94, 133 Stat. 2534
(Dec. 20, 2019); Div. T, Title I, Sec. 105, Pub. L. 117-328, 136
Stat. 4459 (Dec. 29, 2022); Secretary of Labor's Order 1-2011, 77 FR
1088 (Jan. 9, 2012); Secs. 2510.3-21, 2510.3-101 and 2510.3-102 also
issued under Sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 752 (2018) (E.O. 12108, 44 FR 1065 (Jan. 3, 1979)), and 29
U.S.C. 1135 note. Section 2510.3-38 also issued under Sec. 1(b) Pub.
L. 105-72, 111 Stat. 1457 (Nov. 10, 1997).

0
2. Revise Sec. 2510.3-21 to read as follows:

Sec. 2510.3-21 Definition of ``Fiduciary.''

(a)-(b) [Reserved]
(c) Investment advice. (1) For purposes of section 3(21)(A)(ii) of
the Employee Retirement Income Security Act of 1974 (ERISA), section
4975(e)(3)(B) of the Internal Revenue Code (Code), and this paragraph,
a person renders ``investment advice'' with respect to moneys or other
property of a plan or IRA if the person makes a recommendation of any
securities transaction or other investment transaction or any
investment strategy involving securities or other investment property
(as defined in paragraph (f)(10) of this section) to a retirement
investor (as defined in paragraph (f)(11) of this section), and either
paragraph (c)(1)(i) or (ii) of this section are satisfied:
(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 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
(ii) The person represents or acknowledges that they are acting as
a fiduciary under Title I of ERISA, Title

[[Page 32257]]

II of ERISA, or both, with respect to the recommendation.
(iii) A person does not provide ``investment advice'' within the
meaning of this paragraph (c)(1)(iii) if they make a recommendation but
neither paragraph (c)(1)(i) nor (c)(1)(ii) of this section is
satisfied. For example, a salesperson's recommendation to purchase a
particular investment or pursue a particular investment strategy is not
investment advice if the person does not represent or acknowledge that
they are acting as a fiduciary under ERISA Title I or Title II with
respect to the recommendation and if the circumstances would not
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. Similarly, the mere provision of investment
information or education, without an investment recommendation, is not
advice within the meaning of this rule.
(iv) Written statements by a person disclaiming status as a
fiduciary under ERISA Title I or Title II, or this section, or
disclaiming the conditions set forth in paragraph (c)(1)(i) of this
section, 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.
(2) A person who is a fiduciary with respect to a plan or IRA by
reason of rendering investment advice (as defined in paragraph (c)(1)
of this section) for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan or IRA, or
having any authority or responsibility to do so, shall not be deemed to
be a fiduciary regarding any assets of the plan or IRA with respect to
which such person does not have any discretionary authority,
discretionary control, or discretionary responsibility, does not
exercise any authority or control, does not render investment advice
(as defined in paragraph (c)(1) of this section) for a fee or other
compensation, and does not have any authority or responsibility to
render such investment advice, provided that nothing in this paragraph
shall be deemed to:
(i) Exempt such person from the provisions of section 405(a) of
ERISA concerning liability for fiduciary breaches by other fiduciaries
with respect to any assets of the plan; or
(ii) Exclude such person from the definition of the term ``party in
interest'' (as set forth in section 3(14)(B) of ERISA) or
``disqualified person'' (as set forth in section 4975(e)(2) of the
Code) with respect to any assets of the plan or IRA.
(d) Execution of securities transactions. (1) A person who is a
broker or dealer registered under the Securities Exchange Act of 1934,
a reporting dealer who makes primary markets in securities of the
United States Government or of an agency of the United States
Government and reports daily to the Federal Reserve Bank of New York
its positions with respect to such securities and borrowings thereon,
or a bank supervised by the United States or a State, shall not be
deemed to be a fiduciary, within the meaning of section 3(21)(A) of
ERISA or section 4975(e)(3) of the Code, with respect to a plan or an
IRA solely because such person executes transactions for the purchase
or sale of securities on behalf of such plan or IRA in the ordinary
course of its business as a broker, dealer, or bank, pursuant to
instructions of a fiduciary with respect to such plan or IRA, if:
(i) Neither the fiduciary nor any affiliate of such fiduciary is
such broker, dealer, or bank; and
(ii) The instructions specify:
(A) The security to be purchased or sold,
(B) A price range within which such security is to be purchased or
sold, or, if such security is issued by an open-end investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1,
et seq.), a price which is determined in accordance with Rule 22c-1
under the Investment Company Act of 1940 (17 CFR 270.22c-1),
(C) A time span during which such security may be purchased or sold
(not to exceed five business days), and
(D) The minimum or maximum quantity of such security which may be
purchased or sold within such price range, or, in the case of a
security issued by an open-end investment company registered under the
Investment Company Act of 1940, the minimum or maximum quantity of such
security which may be purchased or sold, or the value of such security
in dollar amount which may be purchased or sold, at the price referred
to in paragraph (d)(1)(ii)(B) of this section.
(2) A person who is a broker-dealer, reporting dealer, or bank
which is a fiduciary with respect to a plan or IRA solely by reason of
the possession or exercise of discretionary authority or discretionary
control in the management of the plan or IRA or the management or
disposition of plan or IRA assets in connection with the execution of a
transaction or transactions for the purchase or sale of securities on
behalf of such plan or IRA which fails to comply with the provisions of
paragraph (d)(1) of this section shall not be deemed to be a fiduciary
regarding any assets of the plan or IRA with respect to which such
broker-dealer, reporting dealer or bank does not have any discretionary
authority, discretionary control, or discretionary responsibility, does
not exercise any authority or control, does not render investment
advice (as defined in paragraph (c)(1) of this section) for a fee or
other compensation, and does not have any authority or responsibility
to render such investment advice, provided that nothing in this
paragraph shall be deemed to:
(i) Exempt such broker-dealer, reporting dealer, or bank from the
provisions of section 405(a) of ERISA concerning liability for
fiduciary breaches by other fiduciaries with respect to any assets of
the plan; or
(ii) Exclude such broker-dealer, reporting dealer, or bank from the
definition of the term ``party in interest'' (as set forth in section
3(14)(B) of ERISA) or ``disqualified person'' (as set forth in section
4975(e)(2) of the Code) with respect to any assets of the plan or IRA.
(e) For a fee or other compensation, direct or indirect. For
purposes of section 3(21)(A)(ii) of 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

[[Page 32258]]

of'' such transaction or service if the fee or compensation would not
have been paid but for the recommended transaction or the provision of
investment 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.
(f) Definitions. For purposes of this section--
(1) The term ``affiliate'' of a person means any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such person; any officer, director,
partner, employee, representative, or relative (as defined in paragraph
(f)(13) of this section) of such person; and any corporation or
partnership of which such person is an officer, director, or partner.
(2) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(3) The term ``IRA'' means any account or annuity described in Code
section 4975(e)(1)(B) through (F), including, for example, an
individual retirement account described in section 408(a) of the Code
and a health savings account described in section 223(d) of the Code.
(4) The term ``IRA owner'' means, with respect to an IRA, either
the person who is the owner of the IRA or the person for whose benefit
the IRA was established.
(5) The term ``IRA fiduciary'' means a person described in Code
section 4975(e)(3) with respect to an IRA. For purposes of this
section, an IRA owner or beneficiary who is merely receiving investment
advice is not an IRA fiduciary.
(6) The term ``plan'' means any employee benefit plan described in
section 3(3) of ERISA and any plan described in section 4975(e)(1)(A)
of the Code.
(7) The term ``plan fiduciary'' means a person described in ERISA
section (3)(21)(A) and Code section 4975(e)(3) with respect to a plan.
For purposes of this section, a plan participant or beneficiary who is
receiving investment advice is not a ``plan fiduciary'' with respect to
the plan.
(8) The term ``plan participant'' or ``participant'' means, for a
plan described in section 3(3) of ERISA, a person described in section
3(7) of ERISA.
(9) The term ``beneficiary'' means, for a plan described in section
3(3) of ERISA, a person described in section 3(8) of ERISA.
(10) The phrase ``recommendation of any securities transaction or
other investment transaction or any investment strategy involving
securities or other investment property'' means 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 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.
(11) The term ``retirement investor'' means a plan, plan
participant or beneficiary, IRA, IRA owner or beneficiary, plan
fiduciary within the meaning of ERISA section (3)(21)(A)(i) or (iii)
and Code section 4975(e)(3)(A) or (C) with respect to the plan, or IRA
fiduciary within the meaning of Code section 4975(e)(3)(A) or (C) with
respect to the IRA.
(12) 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.
(13) The term ``relative'' means a person described in section
3(15) of ERISA and section 4975(e)(6) of the Code or a sibling, or a
spouse of a sibling.
(g) Applicability. Effective December 31, 1978, section 102 of the
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 752 (2018),
transferred the authority of the Secretary of the Treasury to
promulgate regulations of the type published herein to the Secretary of
Labor. Accordingly, in addition to defining a ``fiduciary'' for
purposes of section 3(21)(A)(ii) of ERISA, this section applies to the
parallel provision in section 4975(e)(3)(B) of the Code, which defines
a ``fiduciary'' of a plan defined in Code section 4975 (including an
IRA) for purposes of the prohibited transaction provisions in the Code.
For example, a person who satisfies paragraphs (c)(1)(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
ERISA, a fiduciary of such a plan as defined in paragraph (f)(11), or a
participant or beneficiary of such plan, including a recommendation
concerning the rollover of assets currently held in a plan to an IRA,
is a fiduciary subject to Title I of ERISA.
(h) Continued applicability of State law regulating insurance,
banking, or securities. Nothing in this section shall be construed to
affect or modify the provisions of section 514 of Title I of ERISA,
including the savings clause in section 514(b)(2)(A) for State laws
that regulate insurance, banking, or securities.

Signed at Washington, DC, this 10th day of April, 2024.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2024-08065 Filed 4-24-24; 8:45 am]
BILLING CODE 4510-29-P

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