Law stated as of 17 Dec 2020 • USA (National/Federal)
The Department of Labor (DOL) has released a final prohibited transaction class exemption (PTE 2020-02) on fiduciary investment advice to retirement investors, including in the context of rollovers.
On December 15, 2020, the Department of Labor (DOL) released Prohibited Transaction Exemption 2020-02, a class exemption on fiduciary investment advice to retirement investors, including in the context of rollovers. The class exemption would allow financial institutions and investment professionals who provide fiduciary investment advice to retirement investors to receive otherwise prohibited compensation if they comply with certain requirements.
Fiduciary Rule (2016)
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 prohibited transaction exemptions (PTEs), the Best Interest Contract Exemption (BICE) and Principal Transactions Exemption, and revised several existing PTEs.
Fifth Circuit Decision (2018)
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, see:
In May 2018, the DOL released Field Assistance Bulletin (FAB) 2018-02. FAB 2018-02 provided a temporary enforcement policy under which the DOL would 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).
DOL Implements Fifth Circuit Decision and Proposes PTE (June 2020)
In June 2020, the DOL:
Released a technical amendment to implement the Fifth Circuit's 2018 vacatur of the DOL's fiduciary rule on investment advice. Among other things, the technical amendment reinstated 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).
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. Under the final exemption (PTE 2020-02), financial institutions and investment professionals who provide fiduciary investment advice to retirement investors could receive otherwise prohibited compensation if they comply with certain requirements.
The exemption covers:
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.
Changes from Proposal
PTE 2020-02 makes some notable changes from the proposal, including:
Requiring written disclosures to retirement investors about the reasons that a rollover recommendation was in their best interest.
Limiting the recordkeeping requirements to allow only the DOL and Treasury Department access to a financial institution's records. Under the proposal, plan fiduciaries and other retirements investors would have received access to the records.
The addition of a self-correction option for certain violations of the exemption.
That certification of the retrospective review can be made by any senior executive officer, as defined in the exemption, rather than the chief executive officer.
Impartial Conduct Standards
To rely on the exemption, investment advice fiduciaries 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.
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;
describe any material conflicts of interest; and
for any rollover recommendation, give the specific reasons for that rollover recommendation.
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 a retrospective annual review to determine compliance with the impartial conduct standards, including annual certification from a senior executive office of the institution.
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.
An investment professional or financial institution cannot rely on the exemption for ten years after:
Conviction of a crime described in ERISA Section 411 (29 U.S.C. § 1111) relating to the investment advice.
The DOL issues a notice of ineligibility based on:
a systemic pattern or practice of violating the conditions in the exemption; or
providing materially misleading information to the DOL about their conduct under the exemption.
PTE 2020-02 will be effective 60 days after publication in the Federal Register. In addition, the temporary enforcement policy under FAB 2018-02 will remain in place for one year after PTE 2020-02 is published in the Federal Register.
In the preamble to PTE 2020-02, the DOL discusses its current interpretation of the five-part test for determining fiduciary status, including examples of when the "regular basis" prong of the test would be satisfied. Financial institutions, investment advisers, and other potential investment advice fiduciaries should carefully review PTE 2020-02 to determine whether they want to rely on the exemption, and for a greater understanding of the DOL's current thinking on the five-part fiduciary test.