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DOL Adopts New Prohibited Transaction Exemption
The regulator has finalized a potentially important new prohibited transaction exemption.
The U.S. Department of Labor (DOL) has published the final version of its updated fiduciary rule regulation, which it has titled “Improving Investment Advice for Workers & Retirees.”
The new regulation package stretches to nearly 300 pages, so it will naturally take some time for the full implications to be realized. However, a preliminary review suggests the final version resembles the version proposed this summer. Namely, the final regulation confirms the reinstatement of the traditional “five-part test” for determining fiduciary status, and the package includes the establishment of a new prohibited transaction exemption that aligns with the Securities and Exchange Commission (SEC)’s Regulation Best Interest (Reg BI).
Under the DOL’s five-part test, for assistance or instruction to constitute “fiduciary investment advice,” a financial institution or investment professional who is not a fiduciary under another provision of the law must trigger all of the following stipulations:
- Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property;
- On a regular basis;
- Pursuant to a mutual agreement, arrangement or understanding with the plan, plan fiduciary or individual retirement account (IRA) owner, that;
- The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that;
- The advice will be individualized based on the particular needs of the plan or IRA.
According to a fact sheet shared by the DOL, advice pertaining to IRA rollovers will not necessarily trigger fiduciary status under the new paradigm. Here’s how the fact sheet describes whether rollover-related guidance is in fact fiduciary investment advice: “Advice to take a distribution from an employee benefit plan and roll over the assets to an IRA may be an isolated and independent transaction that would fail to meet the regular-basis prong of the five-part test. On the other hand, advice to roll over employee benefit plan assets can occur as part of an ongoing relationship or an anticipated ongoing relationship that an individual enjoys with his or her advice provider.”
It is likely that this provision of the rulemaking will receive significant scrutiny in the coming days and weeks, given the interest consumer protection organizations have in addressing potential abuse related to IRA rollovers into higher-fee products and services.
According to the fact sheet, the new proposed class exemption would be available to registered investment advisers (RIAs), broker/dealers (B/Ds), insurance companies, banks and individual investment professionals who are their employees or agents.
“The new proposed class exemption would permit investment advice fiduciaries to receive compensation as a result of providing fiduciary investment advice, including fiduciary investment advice to roll over a participant’s account in an employee benefit plan to an IRA and other similar types of rollover recommendations,” the fact sheet states. “The new proposed class exemption would also permit investment advice fiduciaries to enter into ‘principal transactions’ in which they could sell or purchase certain securities and other investments from their own inventories to or from plans and IRAs.”
The DOL says the proposed class exemption would require fiduciary investment advice to be provided in accordance with the following criteria: “A best interest standard, a reasonable compensation standard and a requirement to make no materially misleading statements about recommended investment transactions and other relevant matters.” Ostensibly, by complying with Reg BI, advisers or other investment professionals will satisfy all three of these criteria.
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