While the Department of Labor (DOL) has made many adjustments to the fiduciary rule since 2016, the latest release establishes a final ruling that is set to go into effect on September 23rd, 2024, with a one-year transition period following the effective date for parties to come into full compliance. The new ruling broadened the definition of fiduciary investment advice by replacing the 5-part test, clarifying the DOL’s interpretation of when the fiduciary status applies, and adjusting what would be considered a safe harbor. This comprehensive guide will cover:

• Fiduciary Definition Changes
• Determining if Your Transaction is Subject to New Ruling
• Prohibited Transaction Exemptions (PTE)
• Preparing to Implement

Fiduciary Definition Changes

The new ruling expands the definition of fiduciary investment advice to encompass more types of advice and broadens the definition of who is considered a fiduciary, and thus, who must abide by fiduciary standards.

The current five-part test classifies a person as a fiduciary if the following conditions apply:

1. They render advice as 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
4. The advice serves as the primary basis for investment decisions with respect to plan assets
5. The advice is individualized based on the particular needs of the plan

With the new ruling from the DOL, the 5-part test will no longer be the basis for determining what is considered fiduciary advice. Major changes from this previous version and the new ruling in September include:

• Elimination of requirement that investment advice be provided to advise recipient on a “regular basis”
• Anyone who provides investment recommendations to any investors is a “regular basis.” One time advice will be considered fiduciary
• Elimination of “mutual agreement, arrangement, or understanding” and “primary basis” requirements.
• Would the circumstances lead the retirement investor to believe that it could rely upon the advice as “a basis” for an investment decision that is in the retirement investor’s best interest
• Recommendation is required
• 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
• Definition of a retirement investor includes all retirement accounts including non-ERISA
• ERISA plan, plan fiduciary, plan participant or beneficiary, or an IRA, IRA fiduciary or IRA owner or beneficiary. This means traditional non-ERISA plans recommendations would be covered by this rule
• Disclaimers
• Anyone who provides investment recommendations to any investors is a “regular basis.” One time advice will be considered fiduciary
• Indirect compensation
• If the advisor (or an affiliate) receives any fee or compensation, from any source, specifically for the advice or in connection with or as a result of the applicable recommendation this is covered by the rule.
• Commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, mark ups or mark downs, underwriting compensation, expense reimbursements, gifts and gratuities or other non-cash compensation

Determining if Your Transaction is Subject to New Ruling

If you make a recommendation on qualified funds or accounts and the 2-factor test deems you a fiduciary, then the new ruling applies to you and a safe harbor exemption is required.

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 make 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 judgement 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
• 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.

If you make a recommendation on qualified funds or accounts and the 2-factor test deems you a fiduciary, then the new ruling applies to you and a safe harbor exemption is required.

Under the final rule, a person is an investment advice fiduciary if they provide a recommendation in one of the following contexts:

Prohibited Transaction Exemptions (PTE)

In order for an agent and/or advisor to receive compensation for advice related to qualified assets, the proper “safe harbor” disclosure and documentation requirements must be met. Investment advice fiduciaries will generally need to rely on prohibited transaction exemptions (PTE) disclosure and acknowledgement forms PTE 84-24 or PTE 2020-02. For independent insurance agents, PTE 84-24 is the best pathway for compliance purposes.

• PTE 84-24
• Utilized for rollovers into insurance products: Independent insurance agent would now be required to acknowledge fiduciary status
• Insurance carriers: insurance company would be required to exercise supervisory authority over the independent agent with regard to an agent’s recommendation of the insurance company’s own products
• PTE 2020-02
• Permits various types of otherwise prohibited variable compensation to be paid to financial instructions and investment professionals as fiduciaries
• Requirements:
• Acknowledge their fiduciary status in writing
• Disclose their services and material conflicts of interest
• Adhere to certain impartial conduct standards
• Adopt policies and procedures prudently designed to ensure compliance with the impartial conduct standards
• Mitigate conflicts of interest

It’s worth nothing that insurance carriers are going to be hit the hardest as they have new responsibilities, record keeping, and reporting requirements.

Nevertheless, there are steps you can take to protect your practice:

1. Obtain old plan or account documentation to do a proper comparison of features
2. Document your comparisons (fess/products/services)
3. Attend any available carrier training webinars
4. Utilize an updated PTE 84-24 disclosure when released
5. Keep in communication with your FSR for additional training webinars and resources

Contact LifePro Today!

If you are looking for a partner who cares about your clients as much as you do, please reach out to LifePro Financial Services at 888-543-3776. We are a premier IMO located in San Diego, CA that has been in business since 1986 and was originally founded by Bill Zimmerman.

Our focus is getting advisors in front of the right prospects through our proprietary digital marketing systems while offering industry best-case design and reporting, professional back-office support, and competitive compensation with incentives.

This information does not substitute for legal guidance and is meant for educational purposes only. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Remember to consider your client's individual circumstances and objectives when discussing their specific situation.LifePro is not a government entity and is not affiliated with the Department of Labor. Please note that the new Fiduciary Rules should be upheld in addition to the current laws and regulations that govern your profession.