DOL Finalizes Prohibited Transaction Exemption for Investment Advice Fiduciaries

The DOL has finalized its prohibited transaction exemption (PTE) allowing investment advice fiduciaries to receive reasonable compensation and engage in certain principal transactions, including as part of a rollover to an IRA. The PTE may be used by financial institutions (including registered investment advisors, broker-dealers, banks, and insurance companies), and individual investment professionals, and provides relief under the prohibited transaction provisions of both ERISA and the Code. Covered transactions may involve ERISA-covered pension or welfare plans, IRAs, and other specified plans. The PTE’s preamble also includes the DOL’s final interpretation of the reinstated five-part test for determining when a person is providing investment advice and provides the DOL’s views on when advice to roll over plan assets to an IRA will be considered fiduciary investment advice.

The final PTE retains the proposal’s broad protective framework (see our Checkpoint article), which relies on impartial conduct standards (including the requirement that investment advice be in the best interest of the investor); disclosure requirements (including a written acknowledgment of fiduciary status); an obligation to establish and maintain policies and procedures that are prudently designed to ensure compliance with the impartial conduct standards and mitigate conflicts of interest; and at least annual retrospective compliance reviews. The final PTE also specifies when financial institutions and investment professionals will no longer be eligible to rely on its terms (e.g., for ten years after certain criminal convictions). Here are highlights of the PTE changes and the DOL’s reinterpretation of the five-part test as it applies to rollovers:

• Recordkeeping Requirements. Only the DOL and Treasury Department must be allowed access to a financial institution’s compliance records; those records will not have to be provided to plan fiduciaries and other retirement advisors.
• Disclosure Requirements. A financial institution that recommends a rollover must—before the rollover—provide the investor with a written disclosure stating the specific reasons why a rollover recommendation was in the investor’s best interest.
• Retrospective Review. The written report of a financial institution’s retrospective review can be certified by any senior executive officer, as defined in the exemption.
• Self-Correction. A self-correction mechanism has been added allowing correction of violations of the PTE’s conditions if four conditions are met: (1) the violation did not result in investment losses or the investor was made whole; (2) the violation is corrected and the DOL is notified of the violation and correction within 30 days after the correction; (3) correction occurs no later than 90 days after the financial institution knew or reasonably should have known of the violation; and (4) the violation and correction are timely disclosed and described in the financial institution’s retrospective review.
• Rollover Advice. The preamble explains that previous DOL guidance (specifically, the 2005 “Deseret Letter”) was incorrect when it stated that advice to take a distribution from an ERISA-covered plan is not advice with respect to plan assets. Such guidance now is considered advice with respect to plan assets, but it will not be considered fiduciary advice unless it is provided by a person who satisfies all of the requirements of the five-part test for fiduciary investment advice. In response to commenters’ concerns about retroactive liability, the preamble explains that the DOL will not pursue claims for breach of fiduciary duty or prohibited transaction violations based on rollover recommendations that would have been considered non-fiduciary conduct under the Deseret Letter. This enforcement relief applies for the period between 2005 and February 16, 2021.

The PTE is effective February 16, 2021. The temporary enforcement policy set forth in Field Assistance Bulletin 2018-02 (see our Checkpoint article) remains in effect until December 20, 2021.

EBIA Comment: The final PTE does not replace any existing exemption. It is another option, but one that may be more attractive than the alternatives because it is principles-based and not limited by the nature of the provider or its business model. Those who have relied on the guidance provided in Field Assistance Bulletin 2018-02 will already be familiar with (and following) the PTE’s impartial conduct standards, so coming into compliance with the PTE will only require implementing the PTE’s additional requirements by the end of the transition period (December 20, 2021). In the long run, the more consequential portion of this guidance may turn out to be the DOL’s views on the five-part test and the test’s application to rollovers. This guidance is not easily accessed, as it is scattered throughout the preamble. But it will be essential reading for any service provider wishing to steer clear of fiduciary status. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.D (“Investment Advice Fiduciaries”) and XXIV.L (“Prohibited Transactions”), and EBIA’s Consumer-Driven Health Care manual at Section XVI.E (“Overview of HSA Prohibited Transaction Rules”).

Contributing Editors: EBIA Staff.