What You Need to Know
- Key takeaway #1Rule significantly expands the type of advice that results in fiduciary status versus the current rule.
- Key takeaway #2Rule provides extensive explanation of the types of activities that will and will not result in fiduciary status.
- Key takeaway #3Rule becomes effective in September, 2024, so prompt attention to it is needed.
On April 25, 2024, the Department of Labor (“DOL”) published a final rule (the “Final Rule”) regarding when providing investment advice results in the advisor becoming a fiduciary under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”). Under this guidance, an entity is a fiduciary if the provider of that advice to an ERISA plan or Individual Retirement Account:
- Recommends any securities transaction or other investment transaction or investment strategy;
- For a fee; and
- Either:
- Acknowledges that it is acting as a fiduciary with respect to a recommendation; or
- Circumstances indicated that the recommendation is (a) based on a review of the retirement investors’ individual needs or circumstances; (b) reflects the application of the recommender’s professional or expert judgment; and (c) may be relied on by the retirement investor as intended to advance the retirement investor’s best interest.
The Final Rule significantly expands the range of activities that constitute investment advice from the existing ERISA rules, but is less broad than the 2023 proposed rule. The following constitute “recommendations” within the scope of the Final Rule:
- Advising on 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;
- Advising on the management of securities or other investment property, including 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 or voting of proxies appurtenant to securities; and
- Recommending 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.
Importantly, the Final Rule also clarified that certain communications are not investment advice, such as:
- A salesperson’s recommendation of a product if he or she does not acknowledge fiduciary status and the circumstances would not cause a reasonable person to believe that the recommendation is based on the recipient’s individual circumstances or that it may be relied upon as advancing his or her best interests; or
- A salesperson’s providing education or investment information.
However, the DOL noted that disclaimers regarding ERISA fiduciary status regarding investment advice are not controlling to the extent they are inconsistent with other oral or written communications, marketing materials, other laws, or interactions.
The Final Rule also modified the conditions needed to satisfy DOL Prohibited Transaction Exemptions 84-24 (by narrowing which insurance professionals are eligible for exemptive relief but expanding the types of compensation exempt under the exemption) and 2020-02 (which somewhat narrowed the scope of the exemption).
The Final Rule is effective September 22, 2024, with one-year transition periods for the two prohibited transaction exemptions described above.
For further information, please contact:
Joseph K. Urwitz, Partner, Crowell & Moring
jurwitz@crowell.com
