RIA Compliance Blog
In late June, the U.S. Department of Labor reinstated the previous definition of “fiduciary investment advice” that was contained in its prohibited transactions rules prior to 2017. That definition was amended by the “Fiduciary Rule” that went into effect in 2017, but the new rule was ultimately struck down by the Fifth Circuit Court of Appeals. Because the DOL interprets the Fifth Circuit’s decision to have reinstated the original rule, it dispensed with the normal comment period and made the new rule effective immediately.
The original (now reinstated) definition was passed in 1975 and was applied consistently by the DOL and IRS until the 2017 Fiduciary Rule became effective, albeit temporarily. The reinstated definition, being much narrower than the definition under the Fiduciary Rule, means that many fewer situations between plans and investment advisers will constitute “fiduciary investment advice” compared to the 2017 Fiduciary Rule and, consequently, the risk of engaging in a prohibited transaction is smaller.
The prohibited transaction limitations under ERISA, and similar restrictions under the Internal Revenue Code, prohibit certain activities of investment advisers while providing fiduciary investment advice to ERISA plans and IRAs. Under the original (now reinstated) fiduciary rule, an adviser provides fiduciary investment advice if the advice meets all five of the following elements: The advice must: (1) pertain to the purchase, sale or value of securities or other property; (2) be provided on a regular basis; (3) be provided pursuant to a mutual agreement, arrangement or understanding between the provider of the advice and the plan, plan fiduciary or IRA owner; (4) pursuant to the mutual understanding, serve as a primary basis for investment decisions with respect to assets of the plan or IRA; and (5) be individualized to the particular needs of the plan or IRA.
At the same time it reinstated the former rule containing the fiduciary investment advice definition, the DOL also issued new proposed transaction exemptions to the prohibited transaction restrictions that currently apply to financial institutions and professionals who, as part of their business, provide investment advice that is covered as a fiduciary (as originally defined) to ERISA retirement plans and individual retirement accounts. The new exemptions, if adopted, would permit such institutions and professionals to (1) receive compensation in connection with advising clients on rolling over assets into an IRA; and (2) to act as principal in connection with certain trades made with retirement assets.
The new proposed prohibited transaction exemption would, if adopted, permit banks, broker dealers, insurance companies, and investment advisers to be compensated for advice that results in a client rolling over plan or IRA assets into an IRA, and for managing an IRA into which the client’s assets have been rolled over. rollover recommendation and/or principal trades, provided certain conditions are met. The forms of compensation that may be received and types of principal transactions that are permitted are strictly described in the exemption. Also, in addition to meeting the conditions described below, any fiduciary relying on the exemption must not be a fiduciary to a plan for any reason other than providing fiduciary investment advice.
In order to claim the benefit of the exemption, the following conditions must be met:
- The firm and the professional must comply with “impartial conduct standards” which are similar to the standards that accompanied the BIC exemption;
- The firm and the professional must provide a written description of the services offered or provided and a written acknowledgement of their fiduciary obligation;
- The firm must maintain and enforce policies and procedures to comply with the impartial conduct standards and mitigate conflicts of interest;
- The firm must annually prepare a written report reviewing its policies and procedures to assure compliance with the impartial conduct standards and other requirements of the exemption.
This is a very brief summary of the proposed rules. The actual texts of the rules should be consulted before attempting to rely on the new proposed exemptions or understand existing prohibited transactions. Anyone seeking to provide comments on the proposed rule to the DOL must submit them on or before August 6, 2020.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.