Editor's Note: Two separate district courts in Texas have granted a stay of the effective date of the DOL's 2024 fiduciary standard and related amendments to PTE 84-24 and PTE 2020-02, which were set to become effective September 23, 2024. See Federation of Americans for Consumer Choice v. Department of Labor, No. 6:24-cv-163-JDK (E.D. Tex. 2024) and American Council of Life Insurers v. Department of Labor, No. 4:24-cv-00482-O (N.D. Tex. 2024). As of the date of this publication, the DOL has dropped its appeals, and the 1975 five-part test continues to apply. The materials below discuss the existing rules as well as the DOL amendments.

In 2020, the DOL introduced a new class exemption, PTE 2020-02. The exemption grants relief to financial advisors and institutions who provide investment advice (including retirement-related and rollover advice, see Q 3977.01) if the terms of the PTE are satisfied.¹

In creating the PTE 2020-02, the DOL's stated goal was to provide impartial conduct standards that are in line with guidance released by other regulators, including the SEC Regulation Best Interest and state-level fiduciary rules. To qualify under the PTE 2020-02, advisors must provide advice in accordance with impartial conduct standards, which include standards related to: (1) acting in the client's best interests, (2) reasonable compensation, (3) refraining from misleading statements, (4) disclosure, (5) conflict mitigation and (6) retroactive compliance review (see below).²

The exemption, which was finalized late in 2020, is available to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions) and their individual employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors.

The exemption defines retirement investors as plan participants and beneficiaries, IRA owners, and plan and IRA fiduciaries. In determining whether an advisor is a fiduciary who may take advantage of the exemption, the new 2024 standard will apply (see Q ). The exemption's relief also specifically applies to otherwise prohibited transactions related to investment advice about retirement plan rollovers. In their 2024 release, the DOL also clarified that robo-advice providers can use PTE 2020-02.

Planning Point: The DOL has proposed a new rule that would make the process for obtaining a prohibited transaction exemption much more difficult. If passed, the changes will apply only prospectively, 90 days after the publication of the final rule in the Federal Register. The proposed regulations would require that communications with the DOL prior to submitting a formal application for exemption will become part of the administrative record that can be requested by the public. Applicants would not be permitted to approach the DOL on an anonymous basis. The regulations would impose new terms with respect to the independent fiduciary or appraiser that may be required. The current regulations provide information about when the fiduciary or appraiser will be considered "independent," providing that the fiduciary or appraiser is independent if less than 2% of their revenue is derived from parties to the transaction (though it is currently possible that they could achieve independent status if the revenue is less than 5%). The new rules would make the standard stricter and require analysis of the revenue from the prior tax year and projected revenue for the current year. If an appraiser and a fiduciary are required, the appraiser must be independent of both the fiduciary and the applicant. It would also be possible that the individual could be deemed not "independent" if they have an interest in the transaction or future transactions of a similar type.

Impartial Conduct Standards

Relief under the exemption is conditioned on adhering to impartial conduct standards, as follows:

Best Interests Standard. The best interest standard follows longstanding legal concepts. It is generally satisfied if investment advice "reflects 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 investor, and does not place the financial or other interest of the [advisor/firm] or any affiliate, related entity or other party ahead of the interests of the investor, or subordinate the investor's interests to their own." The preamble is careful to note that the PTE does not create a duty to monitor—although a duty to monitor could be generated depending upon whether an investment could prudently be recommended to the investor absent ongoing monitoring.³

Reasonable Compensation Rule. The reasonable compensation standard requires that compensation not be excessive, as measured by the market value of the particular services, rights, and benefits the advisor is delivering. The reasonableness of fees will depend on the particular facts and circumstances at the time of the recommendation. Several factors inform whether compensation is reasonable, including the market price of services provided and/or the underlying assets, the scope of monitoring, and the complexity of the product. No single factor is controlling in determining whether compensation is reasonable. The important question is whether the charges are reasonable in relation to what the investor receives. Firms and advisors have no obligation to recommend the transaction that is the lowest cost or that generates the lowest fees without regard to other factors.⁴

The exemption also requires financial firms and advisors to seek to obtain the "best execution" of the investment transaction reasonably available under the circumstances. This duty is satisfied if the advisor complies with applicable federal securities laws, including those imposed by the SEC and FINRA that are beyond the scope of this discussion.⁵

No Misleading Statements. This element requires that statements by the both the financial firm and the advisor to the investor about the recommended transaction and other relevant matters are not materially misleading at the time they are made. The preamble to the PTE states that "other relevant matters" include fees and compensation, material conflicts of interest, and any other fact that could reasonably be expected to affect the investor's investment decisions.⁶

Disclosure Requirement. Financial firms are required to make written disclosure of their fiduciary status to investors prior to engaging in any transactions covered by the exemption. The disclosure must contain a written description of the services to be provided and material conflicts of interest arising out of the services and any recommended investment transaction. The disclosures should be in plain English, considering the investor's level of financial experience. The PTE does not require specific disclosures to be tailored for each investor or each transaction as long as a compliant disclosure is provided before engaging in the particular transaction.⁷ In their 2024 amendments, the DOL offered clarification for advisors who discuss recommendations and investment strategies in conversations that take place before the advisor is actually hired by the client. For timing purposes, it is sufficient for the advisor to make the required disclosures at or before the time a covered transaction occurs. In these types of situations, the covered transaction is deemed to have occurred at the later of (1) the date the recommendation is made, or (2) the date the advisor becomes entitled to compensation, whether payable now or in the future, because of making the recommendations.⁸ The DOL also clarified that these types of "hire me" conversations do not necessarily create fiduciary status, but the DOL did not specifically exempt them.

Financial Firms' Policies & Procedures Requirement. The exemption requires financial firms to establish, maintain and enforce written policies and procedures prudently designed to ensure compliance with the impartial conduct standards. These policies and procedures should be designed to mitigate conflicts of interests generally and avoid incentives to violate the impartial conduct standards.⁹
Administrative Details

The final PTE adds a self-correction procedure. Advisors and firms will not be treated as violating the prohibited transaction rules if the advisor corrects the violation, notifies the DOL via email within 30 days and the correction occurs within 90 days of when the advisor learned of the violation. The advisor will also be required to make the investor whole again for any losses that occurred because of the violation. The financial institution is also required to notify the person responsible for conducting retrospective compliance reviews under
the PTE.

This retrospective review must be conducted at least annually. Under the final PTE, it must be certified by a senior officer of the financial institution. That officer must certify that the financial institution has procedures and policies in place designed to ensure compliance with the PTE. The officer must further certify that the firm has procedures in place to both test the effectiveness of their policies and modify them to ensure ongoing compliance.

The final PTE introduces a new disclosure document that must be provided to retirement investors before recommending a rollover transaction. The written document must describe the specific reasons for recommending a rollover between two accounts—as well as acknowledge the advisor's status as a fiduciary.
BICE: Administrative Exemption: 2016-01

Prohibited Transaction Exemption 2016-01¹⁰ added the Best Interest Contract (BIC) Exemption as part of the Department of Labor's 2016 Fiduciary Rule (now repealed), designed to minimize conflicts of interest and provide that advisors act in the employee or participant's best interests. Under the BIC Exemption, financial institutions and advisors could receive variable compensation by acknowledging they were fiduciaries in providing investment advice and adhere to impartial conduct standards. In addition, the financial institution was required to have policies and procedures in place designed to ensure compliance with the impartial conduct standards, detect and record any material conflicts of interest, and designate a person responsible for compliance with the impartial conduct standard. Specified information had to be disclosed to participants prior to or at the time transactions based on the advice occur. That information was also required to be posted on a website maintained by the firm.
Historical Background

After the Fifth Circuit vacated the 2016 DOL fiduciary rule, the DOL removed the Best Interest Contract Exemption (BICE) in 2020. In June 2020, the DOL released a fiduciary PTE 2020-02 to replace the 2016 rule (see the heading below for a discussion of BICE, as it would have applied under the 2016 DOL rule). The DOL has also extended the nonenforcement policy under FAB 2018-02 through January 31, 2022. As a result, the DOL did not pursue prohibited transactions claims against investment advice fiduciaries who were working in good faith to comply with the impartial conduct standards under PTE 2020-02 prior to that date. It also did not treat these fiduciaries as violating the prohibited transaction rules during this period. The DOL did not enforce the "specific documentation" and disclosure requirements for rollovers under PTE 2020-02 through June 20, 2022. Aside from the rollover exception, most other requirements were subject to full enforcement as of February 1, 2022. The retroactive compliance review deadline is six months after the end of the year (June 30, 2023 for 2022 transactions). The review must be certified by a senior executive officer of the institution that provides the investment device. Clients should also remember that any documentation or records related to the review should be retained for at least six years after the review is submitted.

1. See Improving Investment Advice for Workers & Retirees, ZRIN 1210-ZA29.

2. Sec. II(d).

3. Sec. II(a)(1).

4. Sec. II(a)(2).

5. Sec. II(a)(2)(B).

6. Sec. II(a)(3).

7. Sec. II(b).

8 29 CFR Part 2550.

9. Sec. II(c).

10. 81 Fed. Reg. 21002, corrected by 81 Fed. Reg. 44773.

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