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Compliance January 23, 2024
DOL Modifies PTE Application Process
The changes include more explicit criteria and modified definitions of what it means to be an independent fiduciary and appraiser.
Reported by Paul Mulholland
The Department of Labor on Tuesday finalized changes to the process by which prohibited transaction exemption applications are approved. The amendments are based on a proposal from March 15, 2022, but the final version removed many of the elements identified as controversial during a public comment period.
Under the Employee Retirement Income Security Act, plans cannot engage in transactions with “parties in interest,” a category that can include a wide range of actors that have a relationship to the plan. That rule can be bypassed if the plan fiduciary submits and receives an individual or class exemption from the DOL. An individual exemption is given to one party for particular circumstances and cannot be widely relied on, whereas a class exemption is given for a category of actor.
The process for applying for these exemptions is itself governed by regulation. According to the DOL’s finalizing release, “One concern that the Department shares with many of the commenters is that the process was starting to become more drawn-out and longer than necessary.”
The DOL explained that the main factor in prolonging the PTE application process was the fact that the DOL often had to return applications to applicants requesting more information. “This timeline was frustrating to everyone, and commenters noted it throughout their comments,” the finalizing release stated.
To remedy this, the DOL proposed to have applicants explicitly state the information needed in the application. The DOL wrote in the amendment that “some of the friction associated with the exemption process can be reduced because the Department will have less need to request additional information from applicants.”
Changed Definitions
The initial proposal by the DOL also would have revised the definitions of “qualified independent appraiser” and “qualified independent fiduciary” to be more strict. The final rule scales back most of the revised changes due to pushback from commenters.
According to current rules, an appraiser is automatically considered independent if they receive no more than 2% of their revenue under one particular PTE. The final rule modifies this to a facts-and-circumstances test, whereby an appraiser could be deemed to be not independent even if their total revenue falls below 2%. As an example, the DOL said that an appraiser who expects to be retained by a fiduciary for other appraisal work based on their work under a PTE could lose their independent status.
The DOL made essentially the same change for the definition of “qualified independent fiduciary.”
Proposed changes were, for the most part, dropped, except for an amendment in the final rule stating that a fiduciary that receives less than 2% of their revenue from a transaction is no longer automatically deemed independent, as under previous rules, and is now subject to a facts-and-circumstances test.