[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  

[[Page 32122]]


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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

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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

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

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

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

[[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\
---------------------------------------------------------------------------

    \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 
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 
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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 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\
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    \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.
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    \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).
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    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\
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    \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.
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    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.
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    \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).
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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.
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    \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\
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    \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).
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    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\
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    \108\ Id.
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    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.
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    \109\ Id. at 75892-3, 75899-900.
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    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\
---------------------------------------------------------------------------

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

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

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

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

    \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, 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.\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.'').

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[[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\
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    \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\
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    \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\
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    \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\
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    \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\
---------------------------------------------------------------------------

    \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\
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    \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.

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[[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\
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    \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.
---------------------------------------------------------------------------

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

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

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

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

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

    \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\
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    \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).
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    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\
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    \287\ 29 U.S.C. 1108(a), 1135.
    \288\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
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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.
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    \289\ Nat'l Inst. of Fam. & Lifdvocs. v. Becerra, 138 S. Ct. 
2361, 2372-73, 2377 (2018) [hereinafter NIFLA] (citations omitted).
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    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\
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    \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.
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    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.
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    \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))).
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    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).
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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:
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    \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\
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    \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:
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    \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.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \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.
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    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/.
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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), http://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), http://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.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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[[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.
---------------------------------------------------------------------------

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

    \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, http://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\
---------------------------------------------------------------------------

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

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

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

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

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

    \624\ Comment letter received from Morningstar on the 
Notification of Proposed Rulemaking: Retirement Security Rule: 
Definition of an Investment Advice Fiduciary, (January 2024).
---------------------------------------------------------------------------

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

    \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), http://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.
---------------------------------------------------------------------------

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

    \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), http://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\
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    \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: http://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.
---------------------------------------------------------------------------

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

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

    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.
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    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)).
---------------------------------------------------------------------------

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

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

    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).
---------------------------------------------------------------------------

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

    \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\
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    \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\
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    \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.
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    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\
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    \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\
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    \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.

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[[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\
---------------------------------------------------------------------------

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

    \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), 
http://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.
---------------------------------------------------------------------------

    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/index.html.; 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.
---------------------------------------------------------------------------

    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.
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

[[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