RIA Compliance Blog
Last month, the U.S. Department of Labor announced that it has finalized the new “fiduciary rule” proposed during the Trump administration, creating a new exemption to the fiduciary standards that investment advisers must comply with when servicing ERISA accounts and IRAs Specifically, the new rule – Prohibited Transaction Exemption 2002-02 – creates an exception to ERISA’s prohibited transaction rules and similar rules under the Internal Revenue Code. The DOL issued a Fact Sheet summarizing the rule and its impact.
The new exemption grants investment advisers more latitude and in dealing with such accounts. The exemption applies to both SEC and state-registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that serve as investment advice fiduciaries. The exemption is slated to become effective February 16, 2021. Some have speculated, however, that the new Biden administration may withdraw the rule and pursue a more restrictive one similar to the 2016 exemption adopted during the Obama administration.
After the US Court of Appeals for the Fifth Circuit struck down the Obama-era fiduciary rule in 2018, the DOL issued a Field Assistance Bulletin (FAB 2018-02), that was a temporary policy that provided relief under the prohibited transaction rules to investment advice fiduciaries, provided they worked in good faith the follow the “impartial conduct standards” that had been codified in the vacated rule. The impartial conduct standards require that an adviser act in the client’s best interest, receive only reasonable compensation and refrain from misleading clients. The new final rules, designed to supersede FAB 2018-02, were proposed in June 2020. FAB 2018-02 will remain in effect for 365 days following the publication of the new rule in the Federal Register, while the exemption will become effective 60 days after publication.
At the time of proposal, the DOL re-established a five-part test that had been established under a 1975 regulation to determine whether a retirement investment adviser is a fiduciary and therefore eligible for the exemption. As finalized, the rule reinstates the five-part test. The accompanying release “sets forth the Department’s final interpretation of the five-part test of investment advice fiduciary . . . and provides the Department’s views on whether advice to roll over Title I Plans assets to an IRA will be considered fiduciary investment advice.”
Under PTE 2002-02, investment advisers will be required to abide by “impartial conduct standards” which have three critical elements:
- Investment advice must be in the best interest of the investor and must not place any other interests ahead of that interest.
- Compensation paid for such advice must be reasonable.
- Statements made with respect to the transaction must not be materially misleading.
As long as the standards are complied with, a fiduciary adviser can receive a broad variety of compensation that would have been prohibited or curtailed under the 2016 rule, including sales loads, mark-ups and mark-downs, commissions, 12b-1 fees, trails, and revenue sharing payments.
The final exemption also provides that whether an adviser must comply with the requirements of the new exemption in connection with rollover advice depends on the facts and circumstances, particularly whether the adviser intends to provide continuing advice to the IRA or whether instead the rollover advice is an isolated or ad hoc service. In the later case, the new rule suggest that the adviser need not meet the impartial conduct standards in order to establish an exemption from the prohibited transaction rules.
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.