DOL Changes

relationship is formed. In tandem, the DOL also released their final amendments to prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. The effective date of this new rule is September 23, 2024, with a one-year transition period. However, two PTE 202-02 conditions are effective on September 23, 2024, date, which are (i) the adherence to the Impartial Conduct Standards, & (ii) the Pre-Transaction Disclosure, which is the acknowledgment of fiduciary status.

The first and entirely expected result would be filing a lawsuit (or potentially multiple lawsuits) to halt this revamped fiduciary rule. There have been many false starts with similar fiduciary rules, as the initial version was proposed in 2010, followed by the implementation by the Obama administration in 2016, which was struck down in an appeals court in 2018. This version's implementation date of September of this year is roughly a month and a half before the 2024 presidential elections and approximately three and a half months before the start of the next presidential campaign if the current administration does not continue. While the rule's legality is determined in the courts, we have been asked to summarize the most significant impact on our clients.

The obvious initial change will be that most advisors, if not everyone, will become fiduciaries based on the advice provided, which will result in their need to satisfy a PTE requirement, which, in turn, will require additional and more extensive compliance and disclosure requirements. Additional focus will be needed beyond the advisor and compliance/supervision as additional rules and proceeds will be required for other client-facing areas, such as marketing and customer service, to ensure they are within the new requirement rules and guidelines.

        Per the DOL's fact sheet, under the final amendments, there are two administrative exemptions for the management of conflicts of interest with respect to advice:

– PTE 2020-02 is broadly available for advice with respect to the wide universe of investments recommended to retirement investors

– PTE 84-24 is tailed for use by independent insurance agents and is intended to facilitate their ability to make best-interest recommendations under their business model

Both exceptions require that investment recommendations adhere to Impartial Standards, but there is a difference when determining who acknowledges fiduciary status.

If an advisor is a fiduciary and wishes to receive a commission from a third party for their recommendation, they must satisfy either PTE 2020-02 or PTE 84-24. While nearly identical, PTE 84-24 is only available to independent agents who recommend annuities issued by more than one insurance company and solely acknowledge fiduciary responsibility, while under PTE 2020-02, both the advisor and the insurance company acknowledge fiduciary responsibility.

The dual acknowledgment of fiduciary status under PTE 84-24 will require insurance companies to act in a supervision and regulatory capacity. Insurance carriers would be tasked with the oversight of the independent advisors through the development of procedural requirements, review of rollover recommendations, and the supervisory review of the independent advisor's recommendation of the insurance carriers' own product.

While potentially obvious, these changes will have bifurcated effects based on the structure of the financial entity. Banks will likely not be affected, as most have restrictions that do not allow the advisors to sell away, outside the grid, or through an outside business activity. Independent Broker Dealers typically allow advisors to sell outside the grid through their OBAs because, as the name suggests, the advisors are independent. These OBA activities normally comprise fixed and fixed-indexed annuities, and the advisors likely utilize multiple insurance carriers. It will be interesting to see whether independent broker-dealers continue to allow these activities or whether the insurance carriers will continue to be comfortable accepting these annuity sales now that they will also take upon some of the fiduciary responsibility.