DOL Issues Guidance on Investment Advice:

On June 29, 2020, the DOL published two pieces of guidance addressing investment advice that is provided to retirement plan participants and IRA owners.

First, the DOL issued a proposed prohibited transaction class exemption. As background, ERISA’s and the Code’s prohibited transaction rules generally prohibit fiduciaries that provide investment advice to employee benefit plans and IRAs from receiving compensation that varies based on their investment advice and compensation that is paid from third parties. Those provisions also prohibit purchasing and selling investments with plans and IRAs when the fiduciaries are acting on behalf of their own accounts (i.e. principal transactions).

This proposed exemption would allow investment advice fiduciaries to receive compensation (including compensation received as a result of advice concerning rollovers from a plan to an IRA), and to engage in principal transactions, that would otherwise violate ERISA’s and the Code’s prohibited transaction provisions. The exemption would apply to registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that are investment advice fiduciaries. (The remainder of this article will refer to those parties collectively as “IAFs,” although the exemption does provide nuances that do not apply to all such parties.) The exemption would include the following protective conditions designed to safeguard the interests of plan participants and IRA owners:

  • IAFs must only provide investment advice that, when provided, in the best interest of the advice recipient.
  • The IAF’s compensation for investment advice services cannot exceed reasonable compensation, within the meaning of ERISA and the Code.
  • The IAF’s statements to advice recipients regarding the recommended transaction cannot be materially misleading when the statements are made.
  • Before engaging in a transaction pursuant to this exemption, the IAF must provide a disclosure to the advice recipient. The disclosure must include a written acknowledgment that the IAF is a fiduciary under ERISA and the Code, as applicable. The disclosure must also contain a written description of the services to be provided and, if applicable, the IAF’s material conflicts of interest.

IAFs must also take certain internal steps to help ensure compliance with the exemption. For example, they must establish and enforce written policies and procedures in that regard. As another example, they have to conduct a retroactive review (at least annually) that is reasonably designed to assist the IAF in ensuring compliance. IAF’s are also required to maintain, for a period of six years, records demonstrating compliance with this exemption.

Second, the DOL issued a technical amendment. This addresses the United States Court of Appeals for the Fifth Circuit’s 2018 judgment vacating a DOL 2016 final regulation (the “Fiduciary Rule”). The Fiduciary Rule defined who is a fiduciary of an ERISA plan as a result of giving investment advice to a plan or its participants for a fee. The technical amendment removes language from ERISA’s regulations that the Fiduciary Rule added, and it reinstates 1975 guidance defining the term “investment advice fiduciary” as that guidance existed before the Fiduciary Rule (known as the five-part test). The technical amendment is a final rule, as it simply makes ministerial revisions that conform certain ERISA regulations to that court’s 2018 decision.