Changes in Response to Comments
The final rule includes certain changes the DOL made in response to comments received on the initial proposed rule. These changes primarily relate to the new exemption’s disclosure and recordkeeping requirements as well as the addition of a new self-correction provision. The substance of the exemption itself, however, is largely unchanged from the version initially proposed in summer 2020.
The final rule confirms the reinstatement of the five-part test for determining whether a person renders investment advice. Under the DOL’s five-part test, a financial institution or investment professional who is not otherwise a fiduciary under ERISA will be deemed to provide investment advice if such person
- renders advice to a plan as to the value of securities or other property or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property
- on a regular basis
- pursuant to a mutual agreement, arrangement, or understanding with the plan or plan fiduciary that
- the advice serves as a primary basis for investment decisions with respect to such plan assets and
- the advice will be individualized based on the particular needs of the plan
A person’s status as an investment advice fiduciary will be informed by surrounding facts and circumstances. If a financial institution or investment professional meets this five-part test and receives a fee or other compensation (directly or indirectly), it will be deemed an investment advice fiduciary under ERISA and the U.S. Internal Revenue Code of 1986, as amended (IRC) and, if it provides investment advice to an employee benefit plan subject to ERISA, will be subject to ERISA fiduciary duties.
The preamble to the final rule includes a significant amount of discussion from the DOL regarding the fiduciary implications of advice to roll over assets from an employee benefit plan subject to Title I of ERISA to an individual retirement account (IRA). In the preamble, the DOL confirms that advice to roll over assets from an employee benefit plan to an IRA may be covered by the five-part test, depending on the facts and circumstances. As a result, any financial institution or investment professional who makes such a rollover recommendation that satisfies the requirements of the five-part test described above will likely be considered an investment advice fiduciary. The DOL specifically clarifies, however, that a single instance of advice to roll over assets from a Title I plan to an IRA would fail to meet the regular-basis prong and, likewise, that sporadic interactions between a financial services professional and a retirement investor do not meet the regular-basis prong. In any case, it is clear that the determination of whether a fiduciary relationship exists in a given situation will be dependent on the specific facts and circumstances.
New Class Exemption
An investment advice fiduciary is subject to the prohibited transaction provisions of ERISA and the IRC, which restrict fiduciaries from engaging in certain transactions involving plans unless an exemption applies. The final rule includes a new class exemption that would be available to registered investment advisers, broker-dealers, insurance companies, banks, and their respective employees or agents who are investment professionals. The class exemption would allow an investment advice fiduciary to receive compensation for providing fiduciary investment advice and to engage in certain principal transactions, in each case that otherwise would be restricted under the prohibited transaction rules.
Conditions of the Exemption
A. Impartial Conduct Standards. The new class exemption would require fiduciary investment advice to be provided in accordance with the “impartial conduct standards,” which comprise the following:
- Best interest standard: Investment advice fiduciaries would be required to provide advice in the best interest of retirement investors. There are two features of this requirement, each of which must be satisfied:
- Prudence: The advice must reflect the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor.
- Loyalty: The advice must not place the interests of the investment professional, financial institution, or any other party ahead of the interests of the retirement investor.
- Reasonable compensation standard: Investment advice fiduciaries must charge only reasonable compensation for providing investment advice, consistent with the general rules on fiduciary compensation under ERISA and the IRC.
- No materially misleading statements: Investment advice fiduciaries must not make any statements about recommended investment transactions and other relevant matters that are materially misleading at the time they are made.
B. Disclosure Requirements. The exemption requires investment advice fiduciaries to provide appropriate disclosures to retirement investors, including a written acknowledgment that the investment advice fiduciary is a fiduciary under ERISA and Section 4975 of the IRC, as well as a written description of the services to be provided and any material conflicts of interest. If the investment advice fiduciary is providing recommendations relating to a rollover, the fiduciary must provide documentation of the specific reasons for the rollover recommendations.
C. Requirement to Maintain Policies and Procedures. Investment advice fiduciaries must maintain adequate policies and procedures that are prudently designed to ensure compliance with the impartial conduct standards and that mitigate conflicts of interest, as well as an annual retrospective compliance review. Documentation of the reasons for rollover recommendations must also be maintained.
D. Requirement to Conduct a Retrospective Review. The investment advice fiduciary must conduct a retrospective review, at least annually, that is designed to detect any violations of the impartial conduct standards or the policies and procedures described above. The results of this review must be reported to a senior officer of the fiduciary, and that officer must certify certain compliance matters.
E. Eligibility for a Financial Institution to Use the Exemption. Financial institutions and investment professionals are ineligible to rely on the exemption if, during the prior 10 years, they were convicted of certain crimes (including bribery, embezzlement, and fraud) arising out of their provision of investment advice to retirement investors. However, a financial institution with such a criminal conviction may request a determination from the DOL that continued reliance on the exemption would not be contrary to the exemption’s purposes.
F. Self-Correction. The exemption provides that a prohibited transaction will not occur on account of a violation of the conditions of the exemption if certain conditions are satisfied, including that the investment advice fiduciary corrects the violation within 90 days of learning of the violation and notifies the DOL of the violation within 30 days of the correction.
Exclusions From Use of the Exemption
The exemption is not available for the following:
- plans for which the investment advice fiduciary, or an affiliate thereof, is (a) the employer of employees covered by the plan or (b) a named fiduciary or plan administrator selected by a fiduciary that is not independent of the investment advice fiduciary
- investment advice that is generated solely by an interactive website in which computer models or applications provide investment advice based on information supplied by the investor, without any personal interaction with an investment professional (i.e., roboadvice)
- discretionary fiduciary investment arrangements
The new exemption also specifically provides an exemption for riskless principal transactions and certain nonriskless “covered principal transactions,” provided that the conditions described above are satisfied. The exemption defines a “riskless principal transaction” as a transaction in which a financial institution, after receiving an order from a retirement investor to buy or sell an investment, purchases or sells the same investment for the financial institution’s own account to offset the contemporaneous transaction with the retirement investor. The exemption generally defines a “covered principal transaction” as including (1) a purchase of any type of security or other investment property from a retirement plan or IRA and (2) a sale of certain specified securities or investment property (i.e., U.S. dollar-denominated corporate debt securities offered pursuant to a registration statement under the Securities Act of 1933, U.S. Treasury securities, debt securities issued or guaranteed by a U.S. federal government agency other than the U.S. Department of Treasury, debt securities issued or guaranteed by a government-sponsored enterprise, municipal securities, certificates of deposit, and interests in “unit investment trusts”) to a retirement plan or IRA. The exemption allows financial institutions to engage in such principal transactions and receive a markup or markdown or similar payment.