DOL Adopts Prohibited Transaction Exemption for Investment Advice Fiduciaries
The DOL adopted a new prohibited transaction class exemption, Prohibited Transaction Exemption 2020-02 ("Improving Investment Advice for Workers and Retirees"), for persons who are fiduciaries under ERISA as a result of providing investment advice. The new exemption allows these fiduciaries to receive compensation and engage in certain transactions that otherwise would be prohibited under ERISA and Internal Revenue Code Section 4975 ("Tax on Prohibited Transactions").
The exemption relates to the existing temporary enforcement policy adopted by the DOL in Field Assistance Bulletin 2018-02, which was issued after its 2016 fiduciary rule (the "2016 Fiduciary Rule"), associated new exemptions, and amendments to existing class exemptions were vacated by the Fifth Circuit Court of Appeals in 2018 (see previous coverage). In July 2020, the DOL issued the proposal for this new class exemption and, at the same time, issued a technical amendment removing the 2016 Fiduciary Rule from the Code of Federal Regulations and reinstating (i) the regulatory text of the DOL's 1975 regulation that was in place prior to the 2016 Fiduciary Rule and (ii) Interpretive Bulletin 96-1, which concerns participant investment education.
The new class exemption would permit certain investment advice fiduciaries (i.e., SEC- and state-registered investment advisers, broker-dealers, banks, and insurance companies and their respective employees, agents and representatives) to (i) receive compensation as a result of providing investment advice and (ii) engage in principal transactions, including riskless-principal transactions and certain other covered principal transactions (i.e., non-riskless principal transactions that involve certain specified investments) and the receipt of a mark-up, mark-down, or other payment.
Reliance on the exemption by eligible investment advice fiduciaries requires compliance with several conditions, including:
- meeting certain "Impartial Conduct Standards" set forth in the exemption, which are (i) a best interest standard, (ii) a reasonable compensation standard, and (iii) a requirement to make no materially misleading statements about recommended investment transactions and other relevant matters;
- disclosure that includes (i) an acknowledgment that the advice provider is a fiduciary, (ii) a description of the services being provided and material conflicts of interest (that is accurate and not misleading in all material respects), and (iii) justification for a rollover recommendation (prior to engaging in a rollover recommended pursuant to the exemption);
- adoption of policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards; and
- conducting a retrospective annual review.
Additionally, the preamble to the grant of the new exemption includes what the DOL refers to as final interpretive guidance regarding the "five-part test" from the DOL's reinstated 1975 regulation for determining whether a person is an investment advice fiduciary. The interpretive guidance provides the DOL's views on the application of certain elements of the "five-part test" and its views on when advice to roll-over plan assets to individual retirement accounts and annuities could be considered fiduciary investment advice.
The DOL stated that its action broadly aligned the best interest standard in the Impartial Conduct Standards in the new exemption with the conduct standards in the SEC's Regulation Best Interest and the fiduciary duty of registered investment advisers under the U.S. securities laws.
The effective date of the new exemption is February 16, 2021.
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