DOL Implements Vacatur of Fiduciary Rule and Proposes Class Exemption for Fiduciary Investment Advice

Practical Law Legal Update w-026-3333 (Approx. 6 pages)

DOL Implements Vacatur of Fiduciary Rule and Proposes Class Exemption for Fiduciary Investment Advice

by Practical Law Employee Benefits & Executive Compensation

Background

In April 2016, the DOL issued a fiduciary rule (2016 fiduciary rule) that amended the definition of fiduciary investment advice under ERISA Section 3(21)(A)(ii) (29 U.S.C. § 1002(3)(21)(A)(ii)). The fiduciary rule broadened the types of advice that constitute fiduciary investment advice, subject to specific exclusions for particular types of communications that are non-fiduciary in nature. With the 2016 fiduciary rule, the DOL also issued two new PTEs, the Best Interest Contract Exemption (BICE) and Principal Transactions Exemption, and revised several existing PTEs.

In 2018, the US Court of Appeals for the Fifth Circuit vacated the 2016 fiduciary rule in Chamber of Commerce of the United States of America v. United States Dep't of Labor, 885 F.3d 360 (5th Cir. 2018). As a result, the pre-amendment version of the fiduciary rule regulation, which was issued in 1975, was reinstated. For more information on the vacatur, see:

Following the Fifth Circuit's decision, the DOL released Field Assistance Bulletin (FAB) 2018-02. FAB 2018-02 provides a temporary enforcement policy under which the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who comply with the impartial conduct standards for transactions that would have been exempted in the BICE and Principal Transactions Exemption (see Legal Update, FAB 2018-02 Announces Temporary Enforcement Policy for the DOL's Fiduciary Rule).

In the wake of the fiduciary rule vacatur, the Securities and Exchange Commission (SEC) adopted its own investment-advice rule under Regulation Best Interest in 2019 (see Legal Update, SEC Adopts New Broker-Dealer and Investment Adviser Conduct Standards and Disclosure Requirements). According to the DOL, the standard in the proposed class exemption is aligned with the conduct standards in the SEC's Regulation Best Interest.

Technical Amendment Implementing Vacatur of Fiduciary Rule

The DOL has issued a technical amendment implementing the 2018 vacatur of the fiduciary rule by the Fifth Circuit by:

Reinstating the regulatory definition of an investment advice fiduciary as it existed before the 2016 fiduciary rule, commonly known as the five-part test (29 C.F.R. § 2510.3-21).
Removing the Best Interest Contract Exemption (PTE 2016-01) and the Principal Transactions (PTE 2016-02), which were published with the 2016 fiduciary rule.
Returning the PTEs that were amended for the 2016 fiduciary rule to their pre-amendment form (PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128).
Adding Interpretive Bulletin 96-1 (relating to participant investment education) back into the regulations, as it had been removed and incorporated into the 2016 fiduciary rule.

The technical amendment is a final rule and not subject to public comment because it is making ministerial revisions that conform the regulations and PTEs to the Fifth Circuit's decision. It will be effective upon publication in the Federal Register.

For more information on the five-part test, see Practice Note, ERISA Fiduciary Duties: Overview: Determining Fiduciary Status.

Proposed Class Exemption

Additionally, the DOL released a proposed class exemption that is based on the temporary enforcement policy in FAB 2018-02.

Under the proposed class exemption, financial institutions and investment professionals who provide fiduciary investment advice to retirement investors could receive otherwise prohibited compensation if they comply with certain requirements. ERISA and the Code prohibit fiduciaries that provide investment advice to employee benefit plans and IRAs from receiving compensation that varies based on their investment advice and compensation that is paid from third parties.

The exemption would cover:

Investment advice about rollovers, including rollovers from a retirement plan to an IRA or from an IRA to another IRA.
Principal transactions where fiduciaries are acting on behalf of their own accounts.

To rely on the exemption, investment advice fiduciaries would need to comply with a series of "impartial conduct standards" regarding the advice, as follows:

At the time the investment advice is provided, it must be in the "best interest" of the retirement investor, which means it:
- reflects the care, skill, prudence, and diligence under the circumstances that a prudent person acting in a like capacity and familiar with such matters would use, based on the investment objectives, risk tolerance, financial circumstances, and needs of the investor; and
- does not place the financial or other interests of the investment advice fiduciary ahead of the interests of the investor.
The compensation received, directly or indirectly, does not exceed reasonable compensation under ERISA Section 408(b)(2) (29 U.S.C. § 1108(b)(2)) and Code Section 4975(d)(2) (26 U.S.C. § 4975(d)(2)).
Statements to the investor are not materially misleading at the time they are made.

The exemption also requires that:

Prior to the transaction, financial institutions provide written disclosures to the investor that:
- acknowledge fiduciary status;
- describe the services to be provided; and
- describe any material conflicts of interest.
Financial institutions establish, maintain, and enforce written procedures to ensure compliance with the impartial conduct standards.
In the case of a rollover, the financial institution documents the specific reason that the rollover is in the best interest of the investor.
The financial institution conducts an annual review to determine compliance with the impartial conduct standards, including annual certification from the institution's chief executive officer (or equivalent officer).
The financial institution maintains records for six years demonstrating compliance, which must be made available to certain listed parties.

Under the class exemption, covered plans include any employee benefit plan under ERISA Section 3(3) (29 U.S.C. § 1002(3)) and any plan under Code Section 4975(e)(1)(A). An IRA is defined as any account or annuity described in Code Section 4975(e)(1)(B) through (F), including an Archer medical savings account, a health savings account, and a Coverdell education savings account.

Practical Implications

The DOL's release is an important step for retirement plan sponsors, administrators, and service providers, who have been waiting for guidance on the status of the fiduciary rule since the Fifth Circuit's decision in 2018. Notably, in the preamble to the proposed class exemption, the DOL provides a discussion of its current interpretation of the five-part test, including examples of when the "regular basis" prong of the test would be satisfied. The release also confirms that for now, the temporary enforcement policy under FAB 2018-02 will remain in place.

The DOL requested comments on a number of items in the proposed exemption. Interested parties will have 30 days to comment after the proposed exemption is published in the Federal Register (publication is scheduled for July 7).

DOL Implements Vacatur of Fiduciary Rule and Proposes Class Exemption for Fiduciary Investment Advice | Practical Law