On June 29, the U.S. Department of Labor (DOL) took two steps to broaden an exemption for investment advice fiduciaries. DOL released a technical amendment that reinstates its 1975 regulations on investment advice, as well as a proposed prohibited transaction class exemption (PTE) for investment advice fiduciaries. The technical amendment became effective July 7 without a public comment period. DOL took the position that the amendment merely reflects the decision of the Fifth Circuit Court of Appeals to vacate the previous fiduciary rule DOL issued in 2016.
Following the Fifth Circuit’s 2018 decision in Chamber of Commerce of the USA v. U.S. Department of Labor, the Securities and Exchange Commission (SEC) issued its own set of rules on investment advice in 2019. The proposed PTE is based on standards similar to those adopted by the SEC. The exemption is subject to a 30-day public comment period that expires on August 6, 2020. This period may be extended, as members of Congress and certain interest groups have expressed concerns about what is perceived as a lack of time to meaningfully discuss the proposed rules.
As indicated above, the primary effect of DOL’s technical amendment is to expressly reinstate the 1975 definition of an investment advice fiduciary, known as the five-part test, which the 2016 regulations had expanded before they were vacated. Under the five-part test, a financial institution or investment professional who is not otherwise a fiduciary under applicable laws is deemed to render investment advice if (1) advice is given as to the value of securities or other property, or recommendations are made as to the advisability to buy or sell such securities or other property, (2) on a regular basis, (3) under an agreement or other arrangement or understanding with the benefit plan, plan fiduciary, or IRA owner pursuant to which (4) investment decisions will be based primarily on such advice and (5) such advice is customized based on the client’s needs. If a person is deemed to be an investment advice fiduciary and provides investment advice to an ERISA plan, it will be subject to ERISA fiduciary rules.
Under the PTE, provided certain requirements are met, investment advice fiduciaries are allowed to receive compensation that would otherwise be prohibited (including commissions, fees, or revenue sharing), as well as to act on behalf of their own accounts in the purchase and sale or securities from their own inventory. Specifically, the PTE would require that investment advice be provided (1) in the best interest of retirement investors (based on principles of prudence and loyalty to the retirement investors), (2) for a reasonable compensation (based on existing rules in ERISA and the Internal Revenue Code) and (3) without materially misleading statements.
Certain written disclosures are also required relating to fiduciary status, the nature of the services to be provided, and any material conflicts of interest. Certain procedural safeguards must be adopted by the investment advice fiduciary in order to ensure compliance with the above principles.
As a result, investment advice fiduciaries are allowed to give advice in connection with a particular transaction, even if they have a personal interest in that transaction, provided that they do not prioritize their own interest to the retirement investors’ detriment.