On June 29, 2020, the DOL proposed a new class exemption for investment advice fiduciaries from certain prohibited transaction rules under ERISA and Section 4975 of the Internal Revenue Code ("Tax On Prohibited Transactions"). The proposed exemption would provide relief for investment advice fiduciaries, and relates to an existing temporary enforcement policy adopted by the DOL after its 2016 DOL fiduciary rule (the "2016 Fiduciary Rule"), related new exemptions and amendments to existing class exemptions were vacated by the Fifth Circuit Court of Appeals in 2018 (see previous coverage).
The proposed class exemption would allow fiduciaries to receive compensation as a result of providing investment advice (including in connection with rollovers to an IRA), and to engage in principal transactions (including riskless-principal transactions) that would otherwise be prohibited under ERISA and Section 4975 of the Internal Revenue Code. Reliance on the proposed exemption, if granted, would generally require compliance with several factors including: (1) compliance with certain "Impartial Conduct Standards;" (2) disclosing that the advice provider is a fiduciary, describing the services being provided and revealing any material conflicts of interest; (3) adoption of and compliance with related policies and procedures; and (4) conducting a retrospective annual review. The Impartial Conduct Standards include compliance with a best interest standard, a reasonable compensation standard, and a requirement that the fiduciary make no materially misleading statements about the transaction and other relevant matters. According to the DOL, the best interest standard included in the proposed exemption as part of the Impartial Conduct Standards is intended to align with the conduct standards set forth in the SEC's Regulation Best Interest and the fiduciary duties of investment advisers under securities laws.
The Notice of Proposed Class Exemption also provides interpretive guidance from the DOL regarding the five-part test for determining when a person is a fiduciary in connection with the provision of investment advice from the DOL's 1975 regulation that was reinstated as a result of the Fifth Circuit's decision vacating the 2016 Fiduciary Rule, and provides the DOL's views regarding when advice to roll-over plan assets to an IRA could be considered fiduciary investment advice.
In addition, the DOL submitted a technical amendment implementing the Fifth Circuit's decision to vacate the 2016 Fiduciary Rule to conform the Code of Federal Regulations to the result of the Fifth Circuit's decision. The Court's Order had the effect of reinstating (i) the regulatory text of the DOL's 1975 regulation in place prior to the 2016 Fiduciary Rule and (ii) Interpretive Bulletin 96-1 regarding participant investment education. The technical amendment also reflects the removal of two exemptions granted in 2016 in connection with the 2016 Fiduciary Rule (the "Best Interest Contract Exemption" and an exemption covering certain for principal transactions), and returning amended versions of prior Prohibited Transaction Class Exemptions (75-1, 77-4, 80-83, 83-1, 84-24, and 86-128) to their pre-amendment forms.
Primary Sources
- DOL Release: Improving Investment Advice for Workers & Retirees
- DOL Release: Conflict of Interest Rule-Retirement Investment Advice: Notice of Court Vacatur
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