Articles Tagged with DOL fiduciary rule

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The SEC recently entered a cease-and-desist order against an SEC-registered investment adviser Federal Prep Advisors, Inc. (“Federal Prep”) and its principal regarding its rollover recommendations from Thrift Savings Plan (“TSP”) accounts to advisory Individual Retirement Accounts (“IRAs”). The SEC determined that Federal Prep did not adequately evaluate and disclose the costs associated with the TSP and its services or the available investment options under the TSP, among other things.[1]

The Thrift Savings Plan is a defined contribution retirement plan for federal employees and members of the uniformed services, and generally has lower fees compared to private employer-sponsored 401(k) plans. From at least June 2020 until around June of 2023, Federal Prep advised approximately 300 clients to rollover assets from a TSP account to an IRA managed by Federal Prep.

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In connection with its recently proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), the U.S. Department of Labor (DOL) also released a proposed amendment to PTE 2020-02: Improving Investment Advice for Workers & Retirees.

Under PTE 2020-02 Financial Institutions and Investment Professionals, which includes investment advisers and their representatives, can receive compensation for recommending certain transactions to Retirement Investors (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) which would otherwise violate the prohibited transaction rules under ERISA and the Code.

Requirements include complying with certain Impartial Conduct Standards (i.e., providing advice that is in the best interest of the Retirement Investor, receiving only reasonable compensation, and avoiding materially misleading statements), providing certain disclosures, adopting policies and procedures, conducting an annual retrospective review, and maintaining records of compliance for six years. Continue reading ›

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This past October the U.S. Department of Labor (DOL) released a proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). Investment advice fiduciaries must generally avoid engaging in certain prohibited transactions absent an exemption. In connection with this proposed amendment, the DOL also released proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24.

Whether an individual is providing fiduciary investment advice under ERISA and the Code is currently determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, a person will be deemed to be rendering fiduciary investment advice if: 1) the person renders advice to a  plan or IRA (including plan participants or beneficiaries) as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the particular needs of the plan or IRA.[1] Section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code further provide that this investment advice must be “for a fee or other compensation, direct or indirect.” Continue reading ›

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The DOL recently dismissed its appeal of an earlier ruling from the U.S. District Court for the Middle District of Florida (the Court) invalidating part of the DOL’s guidance regarding application of its fiduciary duty to rollover recommendations. The guidance was in the form of an FAQ issued in connection with PTE 2020-02 that explained how a recommendation to roll over retirement assets from a plan to an IRA at the beginning of an ongoing relationship could still be subject to ERISA and/or Code fiduciary duties.

Whether an individual is providing fiduciary investment advice under ERISA or the Code is determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, an individual will be deemed to be rendering fiduciary investment advice if: 1) the individual renders advice to a plan or IRA as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the needs of the plan or IRA.[1]
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PTE 2020-02 is a prohibited transaction exemption under ERISA. It requires Financial Institutions, including RIAs, to meet several enumerated requirements, including adhering to the “Impartial Conduct Standards,” in order to rely upon the exemption with respect to certain transactions, including rollover recommendations. It also requires Financial Institutions to adopt policies and procedures to assure compliance with all of the substantive provisions of PTE 2020-02.

RIAs relying on PTE 2020-02 are required to conduct an annual retrospective review of their policies and procedures for compliance with PTE 2020-02. The retrospective review must be documented in a written report that is certified by a senior executive officer of the firm. The review must be reasonably designed to assist the RIA in detecting and preventing violations of the Impartial Conduct Standards and its policies and procedures governing compliance with PTE 2020-02.
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While the majority of the Department of Labor’s new fiduciary rule, Prohibited Transaction Exemption 2020-02 (“PTE 2020-02), became enforceable on January 31st, some of the requirements pertaining to rollover recommendations are set to be enforced on July 1, 2022.

As detailed in this blog post, the DOL provided transition relief in its Field Assistance Bulletin, FAB 2021-02 by extending the enforcement date of PTE 2020-02 through January 31, 2022 for investment advice fiduciaries who are working diligently and in good faith to comply with the “Impartial Conduct Standards” for any transactions that are exempted under PTE 2020-02. These standards include a best interest standard, a reasonable compensation standard, and a requirement to avoid any materially misleading statements about the recommended transaction and other relevant matters.

PTE 2020-02 also requires investment advice fiduciaries to document the specific reasons any rollover recommendations from an employee benefit plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another is in the best interest of the retirement investor. PTE 2020-02 further requires this documentation to be provided to the retirement investor prior to engaging in the rollover. In FAB 2021-02, the DOL announced that it would not enforce the documentation and disclosure requirements for rollover recommendations under PTE 2020-02 through June 30, 2022.
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As anticipated, on October 25, 2021, the Department of Labor extended its previously adopted policy regarding delayed enforcement of Prohibited Transaction Exemption 2020-02 (“PTE 2020-02). This policy extension extended the deadline for enforcement of PTE 2020-02, allowing investment advisers who are investment advice fiduciaries additional time to comply with the exemption.

Sometimes referred to as “Fiduciary Rule 3.0,” PTE 2020-02 provides exemptions from the prohibited transaction rules for investment advice fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs). PTE 2020-02 allows an investment advice fiduciary to advise an ERISA Plan or an IRA and receive variable compensation. In this context, “variable compensation” means compensation that varies based on the advice provided, such as a commission.  For example, even though an investment adviser will receive “additional fees” by recommending that a client or potential client roll over 401(K) assets into an IRA to be managed by the adviser as a fiduciary, such a recommendation will not be deemed a prohibited transaction if the requirements of PTE 2020-02 are met. In order to take advantage of PTE 2020-02, however, the adviser must meet several conditions, which we outlined in a blog post earlier this year.

In 2018, the DOL issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy that explained the DOL would not pursue prohibited transaction claims, nor conclude that persons are violating the prohibited transaction rules if an investment advice fiduciary can demonstrate it worked in good faith and reasonable diligence to comply with “Impartial Conduct Standards” for transactions that would have been exempted under the previously vacated 2016 rule. Those impartial conduct standards include providing investment advice in the client’s best interest, receiving only reasonable compensation, and avoiding any materially misleading statements. FAB 2018-02 was set to expire on December 20, 2021.

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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. Continue reading ›

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On March 15, 2018, the United States Court of Appeals for the Fifth Circuit elected, in a 2-1 decision, to vacate the Department of Labor’s (DOL’s) Fiduciary Rule (Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al.).  In doing so, the Fifth Circuit overturned the Fiduciary Rule in its entirety, including its new definition of fiduciary advice under the Employee Retirement Income Security Act of 1975 (ERISA) and the Internal Revenue Code (Code), as well as the various new exemptions and revisions to existing exemptions that it features.  It is uncertain whether the DOL will request that the Fifth Circuit rehear the case, appeal the case to the United States Supreme Court, or do nothing.  The Fifth Circuit’s decision, however, has not deterred the Securities and Exchange Commission (SEC) from continuing to discuss implementing its own fiduciary rule.

According to the Fifth Circuit’s majority opinion, the DOL exceeded its authority in adopting the new fiduciary investment advice definition in the Fiduciary Rule, finding the definition inconsistent with the plain text of ERISA and the Code. The Fifth Circuit also concluded that the DOL acted “arbitrarily and capriciously” in, among other things, requiring people providing services to IRAs to sign a contract under the Best Interest Contract exemption in which they admit that they are fiduciaries and can be sued. Therefore, the Fifth Circuit concluded that “the Rule fails to pass the tests of reasonableness of the [Administrative Procedures Act].” Continue reading ›

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The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading ›

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