Pension & Benefits News DOL issues final regs and proposed exemption concerning investment advice fiduciaries
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Tuesday, July 28, 2020

DOL issues final regs and proposed exemption concerning investment advice fiduciaries

By Pension and Benefits Editorial Staff

The Department of Labor (DOL) has issued final regulations and a proposed exemption concerning investment advice fiduciaries and conflicts of interest. The final regulations implement the vacatur of the Department’s 2016 final regulations defining who is a “fiduciary” under ERISA and accompanying prohibited transactions by the Fifth Circuit Chamber of Commerce decision. The proposed exemption would allow investment advice fiduciaries to receive compensation, including as a result of advice to roll over assets from a plan to an IRA, and to engage in certain transactions that would otherwise violate the prohibited transaction provisions of ERISA and the Code.

2016 fiduciary regs, PTEs. On April 8, 2016, the Department of Labor (DOL) released final regulations defining who is a “fiduciary” of an employee benefit plan under ERISA Sec. 3(21)(A)(ii) as a result of giving investment advice to a plan or its participants or beneficiaries for a fee or other compensation. These regulations also applied the definition of a “fiduciary” of a plan to an individual retirement account (IRA) under Code Sec. 4975(e)(3)(B). On the same date, the DOL published two new administrative class exemptions from the prohibited transaction provisions of ERISA and the Code: the Best Interest Contract Exemption (BICE, PTE 2016-01, and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02, as well as amendments to the following previously granted exemptions: PTEs 75-1; 77-4; 80-83; 83-1; 84-24; and 86-128 (collectively, the PTEs.

Fifth Circuit vacates fiduciary rule. In 2018, the U.S. Court of Appeals for the Fifth Circuit issued a judgment and mandate vacating the 2016 fiduciary regulations, the new PTEs, and the amendments to the previously granted PTEs (see Chamber of Commerce of the United States of America v. United States Department of Labor). The vacatur had the effect of reinstating the prior 1975 regulations, reinstating Interpretive Bulletin 96-1, which had been removed and largely incorporated into the text of the 2016 fiduciary regulations, revoking PTEs 2016-01 and 2016-02, and returning the previously granted PTEs to their pre-2016 rulemaking form.

The DOL is now issuing final regulations that take the administrative steps necessary to conform the regulatory text in the CFR and the text of the previously granted PTEs to the Fifth Circuit’s vacatur mandate. This technical amendment is a ministerial action to reflect the court’s decision which affects no legal rights or obligations and imposes no costs, according to the DOL. Thus, the DOL final regulations implement the vacatur of the Department’s 2016 final regulations defining who is a “fiduciary” under ERISA. The new final regulations reflect the removal of two prohibited transaction exemptions (PTEs 2016-01 and 2016-02) published with the 2016 final rule and the return of the amended prohibited transaction exemptions (PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128) to their pre-amendment form. In addition, Interpretive Bulletin 96-1 is reinstated. The DOL is also withdrawing the Proposed Best Interest Contract Exemption for Insurance Intermediaries, a related class exemption proposal that was not finalized.

Proposed exemption. The DOL is proposing a class exemption from certain prohibited transaction restrictions of the ERISA and the Code. The prohibited transaction provisions of ERISA and the Code generally prohibit fiduciaries with respect to employee benefit plans and individual retirement accounts and annuities (IRAs) from engaging in self-dealing and receiving compensation from third parties in connection with transactions involving the plans and IRAs. The provisions also prohibit purchasing and selling investments with the plans and IRAs when the fiduciaries are acting on behalf of their own accounts (principal transactions). The proposed exemption would allow investment advice fiduciaries under both ERISA and the Code to receive compensation, including as a result of advice to roll over assets from a plan to an IRA, and to engage in principal transactions, that would otherwise violate the prohibited transaction provisions of ERISA and the Code. The exemption would apply to registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that are investment advice fiduciaries. The exemption would include protective conditions designed to safeguard the interests of plans, participants and beneficiaries, and IRA owners.

In 2018, the DOL issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy providing prohibited transaction relief to investment advice fiduciaries. In the FAB, the Department stated it would not pursue prohibited transactions claims against investment advice fiduciaries who worked diligently and in good faith to comply with “Impartial Conduct Standards” for transactions that would have been exempted in the new exemptions, or treat the fiduciaries as violating the applicable prohibited transaction rules. The Impartial Conduct Standards have three components: a best interest standard; a reasonable compensation standard; and a requirement to make no misleading statements about investment transactions and other relevant matters.

The DOL states that the proposed exemption takes into consideration the public correspondence and comments received by the Department and responds to informal industry feedback seeking an administrative class exemption based on FAB 2018-02.

This new proposed exemption would provide relief that is broader and more flexible than the Department’s existing prohibited transaction exemptions for investment advice fiduciaries, according to the DOL. The DOL’s existing exemptions generally provide relief for discrete, specifically identified transactions, and they were not amended to clearly provide relief for the compensation arrangements that developed over time. The DOL states that the exemption would provide additional certainty regarding covered compensation arrangements and would avoid the complexity associated with a financial institution relying on multiple exemptions when providing investment advice.

The new proposed exemption includes additional conditions designed to support the provision of investment advice that meets the Impartial Conduct Standards. The proposed exemption also provides the Department’s interpretation of the 1975 five-part test of investment advice fiduciary status and provides the Department’s views on when advice to roll over plan assets to an IRA could be considered fiduciary investment advice under ERISA and the Code.

On June 5, 2019, the Securities and Exchange Commission (SEC) finalized a regulatory package relating to conduct standards for broker-dealers and investment advisers. The package included Regulation Best Interest, which establishes a best interest standard applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers. The standards in the Department’s proposed exemption align with standards of other regulators, including the SEC, according to the DOL. The DOL states that the actions of the SEC and the Department will strengthen retirement security for Americans.

Under the proposed exemption, Financial Institutions (registered investment advisers, broker-dealers, banks, and insurance companies) and Investment Professionals (their individual employees, agents, and representatives) could receive a wide variety of payments that would otherwise violate the prohibited transaction rules, including, but not limited to, commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties. The proposed exemption’s relief would extend to prohibited transactions arising as a result of investment advice to roll over assets from a plan to an IRA, and would allow Financial Institutions to engage in principal transactions with plans and IRAs in which the Financial Institution purchases or sells certain investments from its own account.

The proposed exemption has a number of conditions. The proposed exemption would condition relief on the Investment Professional and Financial Institution providing advice in accordance with the Impartial Conduct Standards. In addition, the exemption would require Financial Institutions to acknowledge in writing their and their Investment Professionals’ fiduciary status under ERISA 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. Finally, Financial Institutions would be required to adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and conduct a retrospective review of compliance. The exemption would also provide, subject to additional safeguards, relief for Financial Institutions to enter into principal transactions with Retirement Investors, in which they purchase or sell certain investments from their own accounts.

The proposed exemption requires Financial Institutions to provide reasonable oversight of Investment Professionals and to adopt a culture of compliance. The proposal further provides that Financial Institutions and Investment Professionals would be ineligible to rely on the exemption if, within the previous ten years, they were convicted of certain crimes arising out of their provision of investment advice to Retirement Investors. They would also be ineligible if they engaged in systematic or intentional violation of the exemption’s conditions or provided materially misleading information to the DOL in relation to their conduct under the exemption. Ineligible parties could rely on an otherwise available statutory exemption or apply for an individual prohibited transaction exemption from the Department.

However, the proposed exemption would not expand Retirement Investors’ ability to enforce their rights in court or create any new legal claims above and beyond those expressly authorized in ERISA, such as by requiring contracts and/or warranty provisions.

Source: 85 FR 40589.

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