The Department of Labor has rolled out a new prohibited transaction exemption for offering investment advice, and some good news on rollover advice—but it may be short-lived.
Less than 24 hours after the release from review by the Office of Management and Budget, the DOL has unwrapped a new exemption, one that is slated to become effective 60 days after it is published in the Federal Register—and yes, that would fall after Jan. 20, when it could be reviewed by the incoming Biden administration.
The new prohibited transaction class 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 and is based on an existing temporary policy adopted after the 5th Circuit Court of Appeals vacated the Obama administration’s 2016 fiduciary rule package. According to the DOL, the “new” exemption’s principles-based approach allows investment advice fiduciaries to offer a wide array of investment advice services in compliance with Impartial Conduct Standards.
Those were described as “a best interest standard, a reasonable compensation standard and a requirement to make no materially misleading statements”—and one that was said to be broadly aligned with standards of other regulators, including the Securities and Exchange Commission (SEC), in particular. Indeed, the DOL explains that investment advice fiduciaries relying on the class exemption would have to provide advice in the best interest of retirement investors.
In good news for retirement plan advisors, the new exemption carries forward the provisions from the June 29 proposal, noting that investment advice fiduciaries who recommend a rollover from an employee benefit plan are subject to the fiduciary duties imposed by Title I of ERISA as well as the prohibited transactions provisions in Title I of ERISA and the Internal Revenue Code.
As such, the new prohibited transaction class exemption permits investment advice fiduciaries to receive compensation as a result of providing fiduciary investment advice, including fiduciary investment advice to roll over a participant’s account in a workplace retirement plan to an IRA and other similar types of rollover recommendations (e.g., IRA to IRA).
Significantly, the DOL has taken this opportunity to provide “important information on its views regarding rollovers from employee benefit plans to IRAs.” Specifically, the DOL confirms its belief that advice to take a distribution of assets from an employee benefit plan is, in fact, “advice to sell, withdraw, or transfer investment assets currently held in the plan, and therefore may be covered by the five-part test.”
In a fact sheet accompanying the release, the DOL notes that “all prongs of the five-part test must be satisfied for a financial institution or investment professional to be an investment advice fiduciary when making a rollover recommendation,” with status as an investment advice fiduciary to be “informed by all the surrounding facts and circumstances.”
The DOL also noted that advice to take a distribution from an employee benefit plan and roll over the assets to an IRA “may be an isolated and independent transaction that would fail to meet the regular-basis prong of the five-part test,” but that, on the other hand, “advice to roll over employee benefit plan assets can occur as part of an ongoing relationship or an anticipated ongoing relationship that an individual enjoys with his or her advice provider.” In other words, the rollover advice could be determined to be the beginning of that ongoing relationship.
In applying the regular basis prong of the five-part test, the DOL notes that it intends to preserve the ability of financial services professionals to engage in one-time sales transactions without becoming fiduciaries, including by assisting with a rollover. For example, parties can make clear in their communications that they do not intend to enter into an ongoing relationship to provide investment advice, and avoid fiduciary status, if they act in conformity with that communication.
Moreover, the DOL notes that the determination of whether there is a “mutual agreement, arrangement, or understanding that the investment advice will serve as a primary basis for investment decisions” is appropriately based on the reasonable understanding of each of the parties, if no mutual agreement or arrangement is demonstrated. The DOL also cautioned that written statements disclaiming a mutual understanding or forbidding reliance on the advice as a primary basis for investment decisions are not determinative (although it notes that such statements may be considered to determine whether a mutual understanding exists—not determinative, but relevant).
As noted in the proposal, the DOL has now withdrawn Advisory Opinion 2005-23A (the “Deseret Letter”), but notes that since some parties may have relied on the Deseret Letter before the effective date of the new exemption, it will “not pursue claims for breach of fiduciary duty or prohibited transactions based on rollover recommendations made before the effective date of the final exemption, if the recommendations would not have been considered fiduciary communications under the reasoning of the Deseret Letter.”
The new proposed class exemption would require financial institutions to disclose to retirement investors their status as investment advice fiduciaries—and to provide an accurate written description of their services and material conflicts of interest. The DOL said this is intended to ensure that the fiduciary nature of the relationship is clear to all parties—but does not intend this acknowledgement to create a private right of action as between a financial institution or investment professional and a retirement investor “and it does not believe the exemption would do so.”
The new proposed class exemption would not cover advice arrangements that rely only upon robo-advice—advice that uses robo-advice without interaction with an investment professional. However, the new proposed class exemption would cover “hybrid” robo-advice arrangements which involve advice that is generated by computer models in connection with additional interaction from an investment professional.
There are also some new elements in the final exemption. Regarding rollovers, when making those recommendations, the final rule requires that fiduciaries provide retirement investors with written documentation “of the specific reasons” that the recommendation was in their best interest.
Additionally, the final exemption would also allow any senior executive officer to certify the company’s review of compliance with impartial conduct rules, rather than requiring certification by the chief executive officer as has the original proposal. Finally, the DOL cited a new “self-correction” mechanism that will allow advisors to correct prohibited transactions that “did not result in investment losses to the retirement investor or the financial institution made the retirement investor whole for any resulting losses” and addresses the violation quickly.
Financial institutions are required to maintain records for six years demonstrating compliance with the exemption, but the scope of the final exemption requires only that the records be made available, to the extent permitted by law, to any authorized employee of the Department or the Department of the Treasury (except for the documentation on how rollover recommendations are in the best interest of an investor which are to be accessible by those investors).
Note that the DOL says that the exemption does not expand retirement investors’ ability to enforce their rights in court or create any new legal claims above and beyond those expressly authorized in Title I of ERISA or the Code, such as by requiring contracts and/or warranty provisions.
Policies and Procedures
The new proposed class exemption would require financial institutions to “establish, maintain, and enforce policies and procedures prudently designed to ensure that they and their investment professionals comply with the Impartial Conduct Standards in connection with covered fiduciary investment advice.”
Financial institutions would be required to conduct an annual review that is “reasonably designed to assist them in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the policies and procedures governing compliance with the class exemption.”
Financial institutions and individual investment professionals could lose access to the class exemption for a period of 10 years for certain criminal convictions in connection with the provision of investment advice to retirement investors or for egregious conduct with respect to compliance with the class exemption. Ineligible financial institutions and investment professionals could rely on existing statutory exemptions or seek an individual prohibited transaction exemption from the DOL—but those institutions would be provided with an opportunity to be heard before they became ineligible, and would have a one-year winding-down period “to avoid disruptive transitions.”
One aspect specifically not addressed in the final exemption has to do with Pooled Employer Plans (PEPs). Acknowledging that “several commenters requested additional guidance and clarification regarding the exemption’s application to Pooled Employer Plans (PEPs), which were authorized by the SECURE Act; notably that SECURE mandates that a PEP must be established by a Pooled Plan Provider (PPP), and that since some PPPs would want to make investment advice available through PEPs, by utilizing themselves or an affiliate as the advice provider, clarity was sought (including by the American Retirement Association).
However, the DOL said that it was “premature to address issues related to PEPs, given their recent origination, unique structure, and likelihood of significant variations in fact patterns and potential business models, as the PEPs’ sponsors decide how to structure their operations,” noting that it had recently published a request for information on prohibited transactions applicable to PEPs and is separately considering exemptions related to these types of plans.
The temporary enforcement policy stated in Field Assistance Bulletin 2018-02 will remain in place for one year after the final exemption is published in the Federal Register.
“We are pleased that the Department retained the important pathway for 401(k) fiduciary advisors to continue to work with participants on rollovers,” noted Brian Graff, CEO of the American Retirement Association. “However, given the effective date, it is unclear what the ultimate fate of this guidance will be.”
 The best interest standard is satisfied if the advice is prudent and loyal—the first if it reflects the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor; and the latter if the advice does 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 five-part test requires that for advice to constitute “investment advice,” a financial institution or investment professional who is not a fiduciary under another provision of the statute must: (1) render advice to the plan 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) be pursuant to a mutual agreement, arrangement or understanding with the plan, plan fiduciary or IRA owner, that (4) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and that (5) the advice will be individualized based on the particular needs of the plan or IRA.
 These advice arrangements are covered by the statutory exemption in ERISA sections 408(b)(14) and 408(g) and Code Sections 4975(d)(17) and 4975(f)(8) and the accompanying regulations.
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