Final Rule, Technical Amendment: Conflict of Interest Rule—Retirement Investment Advice: Notice of Court Vacatur, 29 CFR Parts 2509 and 2510; Notice of Proposed Class Exemption: Improving Investment Advice for Workers & Retirees; DOL Fact Sheet: Improving Investment Advice for Workers & Retirees (June 29, 2020)
The DOL has issued a technical amendment formally reinstating its pre-2016 regulation defining investment advice, and has proposed a new prohibited transaction exemption (PTE) for financial institutions and investment professionals who are investment advice fiduciaries. These actions close the book on the DOL’s 2016 fiduciary rule and its related PTEs and exemption amendments, which were vacated by the Fifth Circuit in 2018 (see our Checkpoint article). The technical amendment restores the five-part test for determining when a person is providing investment advice, and reinstates an earlier interpretive bulletin on participant investment education. Under that test, a financial institution or investment professional provides investment advice (1) when rendering advice on the value of securities or making recommendations about the advisability of buying or selling securities; (2) on a regular basis; (3) pursuant to a mutual agreement or understanding with a plan, plan fiduciary, or IRA owner; (4) that the advice will serve as a primary basis for investment decisions; and (5) that the advice will be individualized. A person who provides investment advice for a fee or other compensation is an “investment advice fiduciary.”
The lengthy proposed PTE is based on the temporary enforcement policy set forth in Field Assistance Bulletin 2018-02 (see our Checkpoint article), which remains in place. Here are highlights:
Rollover Advice. The PTE’s preamble addresses the DOL’s current views regarding when advice to roll assets from an ERISA-covered plan to an IRA may constitute investment advice under the five-part test. If rollover advice qualifies (because the regular basis and other requirements are satisfied), the PTE could provide relief for fees resulting from that advice.
Scope of Relief. The PTE would permit investment advice fiduciaries to receive reasonable compensation as a result of providing investment advice (including compensation for rollover advice). Compensation could take a wide variety of forms that would otherwise be prohibited. Investment advice fiduciaries could also enter into “principal transactions” in which investments from or for their own inventories are sold to or purchased from plans (or IRAs). The PTE would not apply to advice provided solely by an interactive website (i.e., “robo-advice”), when the investment advice fiduciary is the plan sponsor, or in certain other situations.
Impartial Conduct Standards. Fiduciaries would be required to provide investment advice according to “impartial conduct standards” consisting of a best interest standard, a reasonable compensation standard, and a requirement to make no materially misleading statements. According to the DOL, these standards align with standards already imposed on investment advisers by the Securities and Exchange Commission (SEC) and many state regulatory bodies. [EBIA Comment: Similar standards were a central feature of the DOL’s vacated Best Interest Contract (BIC) Exemption, and a diligent, good faith attempt to comply with the impartial conduct standards of the BIC Exemption is a requirement under the DOL’s temporary enforcement policy.]
Disclosure and Documentation. Financial institutions would be required to disclose their status as ERISA fiduciaries and provide a written description of their services and material conflicts of interest. For rollovers, they would be required to document why a rollover recommendation is in the best interest of the participant or beneficiary.
Policies and Procedures. The PTE would require financial institutions to establish policies and procedures to ensure compliance with the impartial conduct standards and mitigate conflicts of interest. And financial institutions would be required, at least annually, to conduct a retrospective compliance review culminating in a written report and certification regarding the institution’s compliance processes, policies, and procedures.
Eligibility Restrictions. Certain criminal convictions or other egregious conduct would cause loss of access to the PTE for 10 years.
EBIA Comment: Those who tried to comply with the 2016 final regulation before it was vacated have been in limbo, relying on the temporary enforcement policy as they wait for the DOL to clarify the rules. This technical amendment and proposed PTE signal an end to that uncertainty. And the PTE may offer an unexpectedly easier transition to a permanent compliance approach, since the PTE incorporates significant aspects of both the vacated rule and the temporary enforcement policy. Interested parties should review the PTE carefully. Comments are requested, and are due 30 days after the proposal’s publication in the Federal Register. For more information, see EBIA’s 401(k) Plans manual at Section XXIV.D (“Investment Advice Fiduciaries”) and EBIA’s Consumer-Driven Health Care manual at Section XVI.E.2 (“Who Is a ‘Fiduciary’ With Respect to an HSA?”).
Contributing Editors: EBIA Staff.