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The New DOL Fiduciary Rule – A Return to the Old with a New Proposed Prohibited Transaction Exemption

On June 29, 2020, the DOL issued its much anticipated new “fiduciary rule” under ERISA. The new rule is meant to replace the DOL’s previous fiduciary rule (and related exemptions) which went into effect in 2016 but was vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018. The new fiduciary rule is composed of two parts: (i) a final regulation which reaffirms and reinstates the five-part test for determining whether a person renders “investment advice” for purposes of ERISA (the “Reinstated Rule”), and (ii) a new prohibited transaction class exemption for investment advice fiduciaries based on the “impartial conduct standards” previously adopted by the DOL (the “Proposed Exemption”).

Reinstated Rule

The new rule amends the Code of Federal Regulations to reinstate the prior 1975 regulation which contained the five-part test for determining whether a financial institution or investment professional is a fiduciary for rendering “investment advice.” Such persons are fiduciaries if they, directly or indirectly, receive a fee or other compensation and:

  1. Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
  2. On a regular basis;
  3. Pursuant to a mutual agreement, arrangement, or understanding with the employee benefit plan, plan fiduciary, or IRA owner;
  4. The advice will serve as a primary basis for investment decisions with respect to the employee benefit plan or IRA assets; and
  5. The advice will be individualized based on the particular needs of the employee benefit plan or IRA.

The DOL noted that a person’s status as an investment advice fiduciary will be based on the surrounding facts and circumstances. The DOL also provided some insight on the interpretation of the five-part test, including the determination of “mutual agreement” and “primary basis” for purposes of the Reinstated Rule and noted that rollovers from employee benefit plans to IRAs may, depending on the facts and circumstances, be covered by the five-part test.

Proposed Exemption

Investment advice fiduciaries are subject to certain prohibited transaction restrictions under ERISA and the Internal Revenue Code. In general, under ERISA and the Internal Revenue Code, fiduciaries may not (i) engage in self-dealing, (ii) receive compensation from third parties for transactions involving such plan assets, or (iii) purchase or sell investments with plans when acting on behalf of their own accounts. Provided the conditions of the exemption are met, the Proposed Exemption would allow investment advice fiduciaries to receive compensation for certain transactions that would otherwise be prohibited. Under the Proposed Exemption, among other transactions, provided the exemption conditions are met, investment advice fiduciaries would be permitted to (x) receive payments, including commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties; (y) receive payments for investment advice to roll over assets from an employee benefit plan to an IRA; and (z) purchase or sell certain investments from its own account and engage in certain principal transactions.

The Proposed Exemption would require investment advice to be provided in accordance with the “impartial conduct standards.” Under this standard, investment advice fiduciaries must provide advice that is in the retirement investor’s “best interest” (i.e., in adherence to the duty of prudence and loyalty), charge only “reasonable compensation,” make “no materially misleading statements,” and satisfy various other requirements, each as further described in the Proposed Exemption. The Proposed Exemption also requires certain disclosures be made to retirement investors, the implementation of certain policies and procedures, the performance of certain retrospective compliance reviews, and the adherence of recordkeeping obligations.

The Proposed Exemption is intended to be consistent with guidance from other regulators, such as the “Regulation Best Interest” promulgated by the SEC, which is now effective. Much like the Regulation Best Interest, the Proposed Exemption brings similar requirements of disclosure, care, conflict mitigation, and compliance.

The Reinstated Rule is available here.

The Proposed Exemption is available here.

The DOL’s fact sheet for the new fiduciary rule is available here.

The DOL’s news release for the new fiduciary rule is available here.

The lawyers of our Employee Benefits and Executive Compensation Practice Group are readily able to assist companies on a nationwide basis with implementing sophisticated benefit plans and providing answers to their most challenging compensation issues. Additionally, our lawyers are well aware of the daily employee benefits challenges facing companies of all sizes and are capable of helping in-house lawyers and human resources personnel with the day-to-day advice and guidance necessary to properly administer employee benefits plans.

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