Department of Labor Issues FAQs for Fiduciary Investment Advice Exemption

May 2021
LexisNexis Practical Guidance

On April 13, 2021, the Department of Labor (“DOL”) released guidance on the prohibited transaction exemption pertaining to fiduciary investment advice for retirement investors, employee benefit plans and investment advice providers. The guidance follows the DOL confirmation on February 12, 2021 that PTE 2020‑02, “Improving Investment Advice for Workers & Retirees,” will go into effect as scheduled on February 16, 2021. The guidance comes in the form of two documents. One includes questions that a retirement investor can ask when interviewing potential advice providers and the other is a set of compliance‑focused frequently asked questions (“FAQs”), which provides guidance for investment advice providers who are relying on the exemption. This Client Alert focuses on the latter document.

Under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Internal Revenue Code of 1986, as amended (the “Code”), parties who provide fiduciary investment advice to plan sponsors, plan participants, and IRA owners may not receive payments creating conflicts of interest, unless they comply with protective conditions in a prohibited transaction exemption. On December 18, 2020, the Department finalized PTE 2020‑02. Investment advice fiduciaries who rely on the exemption must render advice that is in the plan and IRA customers’ best interest in order to receive compensation that would otherwise be prohibited in the absence of an exemption, including commissions, 12b‑1 fees, revenue sharing, and mark‑ups and mark‑downs in certain principal transactions.

The DOL’s adoption of PTE 2020‑02 followed various actions regarding the regulation of investment advice. In 2016, the DOL issued a controversial regulation that significantly changed a long‑standing 1975 regulation which provided rules for determining who was an investment advice fiduciary. The DOL also issued new prohibited transaction class exemptions and amended certain existing exemptions, all in order to allow these fiduciaries who were newly created under the new fiduciary rule to be able to receive compensation if certain requirements set forth in the exemptions were satisfied. In 2018, after significant debate and comment, the U.S. Court of Appeals for the Fifth Circuit vacated the new fiduciary rule and the new and amended exemptions. On July 7, 2020, the DOL proposed PTE 2020‑02 and restored the 1975 fiduciary advice regulation, which included a five‑part test to determine who is an investment advice fiduciary.

Many financial institutions and investment professionals, who would have been investment advice fiduciaries under the 2016 rule, are not investment advice fiduciaries under the 1975 regulation because they do not satisfy all five parts of the test. Accordingly, in general, such financial institutions and investment professionals may not need to satisfy the conditions of an exemption when receiving compensation on account of their investment advice that would otherwise be prohibited if they were deemed to be an investment advice fiduciary. PTE 2020‑02 and its preamble does, however, provide additional rules and clarifications for financial institutions and investment professionals who may previously not have considered their recommendations with respect to rollovers from employee benefit plans to IRAs as being fiduciary actions.

Although some of the DOL FAQs provide some additional color with respect to the various requirements under the exemption, most of the FAQs simply reiterate parts of the exemption which have already been published. Maybe the most interesting statement by the DOL in the FAQs is that it intends to take further regulatory and sub‑regulatory actions, including possibly amending the 1975 investment advice fiduciary regulation. This statement may be a precursor to another attempt by the DOL to broaden the definition of an investment advice fiduciary to include investment professionals and financial institutions who currently are not a fiduciary because they do not satisfy all five parts of the 1975 regulation.

The following are some of the highlights of the FAQs:


Rollover Recommendations

Written Acknowledgement of Fiduciary Status

Conflict of Interest Disclosures and Mitigation

Investigation and Compliance

As provided above, especially considering the DOL’s comments in the FAQs, it will not be a surprise if the DOL provides further guidance for financial institutions and investment professionals with respect to who is an investment advice fiduciary and what conditions need to be satisfied in order for an investment advice fiduciary to receive certain compensation that would otherwise be prohibited under ERISA’s prohibited transaction rules.

This article was originally published by Chapman and Cutler LLP on April 22, 2021, and was republished by LexisNexis Practical Guidance in May 2021. The republished article is posted with permission.

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