DOL Releases Final Investment Advice Exemption
On December 18, 2020, the US Department of Labor (DOL) published in the Federal Register the final prohibited transaction class exemption for investment advice, Prohibited Transaction Exemption 2020-02 (Final Investment Advice Exemption). DOL had issued the proposed investment advice exemption (Proposed Exemption) on June 29, 2020, and we discussed it in our previous Advisory. As a recap, the Proposed Exemption and the Final Investment Advice Exemption will allow investment advice fiduciaries to IRAs and ERISA plans (and similar tax-favored accounts) to receive transaction-based and other variable compensation in connection with providing investment advice as a fiduciary, and to engage in certain principal transactions, without violating the prohibited transaction rules of ERISA and the Internal Revenue Code. The Final Investment Advice Exemption is substantially identical to the Proposed Exemption with only a few key changes, one of which will be of particular interest to financial institutions that are involved with rollovers to IRAs. Further, as discussed below, DOL is moving forward with an interpretive change on its view of when a rollover transaction involves fiduciary advice.
One key unanswered question is whether the new administration will move to delay or withdraw the exemption and related interpretive guidance. One approach the new administration could take is to enter an order delaying the effective date of the rule (which does not take effect until February 16, 2021) and then commence a new notice-and-comment rulemaking to amend the rule further or reverse the changes. Another approach, if the Democrats take control of the Senate by winning both Georgia senate seats in the January 5 run off (which is not known at the time of this Advisory), would be to invoke the Congressional Review Act and repeal the rule by resolutions of both Houses of Congress. The DOL might then take up further rulemakings on the issue after Congress acts.
Generally the changes are favorable to financial institutions with the exception of a requirement for a special written disclosure for rollovers. Briefly, the key changes are:
- A financial institution advising on a rollover to an IRA (as well as other types of rollovers) is required to provide written disclosure of the reasons why the rollover is in the investor's best interest. This must be provided before the investor rolls over his retirement funds to the IRA.
- The financial institution is required to meet recordkeeping requirements but the Final Investment Advice Exemption provides that only the DOL and the IRS may obtain access to those records. The Proposed Exemption had permitted access by the investor and plan fiduciaries, among others.
- The annual compliance certification that had been required to be made by the financial institution's chief executive office can be made any "senior executive officer." This is defined as the chief executive officer, chief compliance officer, president, chief financial officer or one of the three most senior officers of the financial institution.
- A self-correction mechanism has been added in the Final Investment Advice Exemption. Under this procedure, the financial institution can correct a violation by timely correcting, and in that case a non-exempt prohibited transaction will not be deemed to have occurred. Requirements for this self-correction include:
- Disclosure to the DOL
- Either no loss to the investor or the financial institution must make the investor whole for resulting losses from the violation
- The correction must be made no later than 90 days after the financial institution learned of, or reasonably should have learned of, the violation.
- The financial institution must notify the person responsible for conducting the retrospective review, setting forth both the violation and correction in the written report of the retrospective review.
Impact of the Final Investment Advice Exemption and Transition Considerations
The Final Investment Advice Exemption is a complex rule and financial institutions and investment advice providers who need to rely on it to receive transaction-based and other variable compensation or to engage in principal transactions will want to carefully review how it affects their business and whether any changes should be made. Given the change in Administration which will occur before the Final Investment Advice Exemption is effective, financial institutions will want to closely follow any actions to delay or withdraw the Final Investment Advice Exemption or any modifications to the available transition relief.
Importantly, the DOL stated in its release of the Final Investment Advice Exemption that it would extend the period of the temporary enforcement policy in FAB 2018-02 until December 20, 2021. This provides a transition period for financial institutions that have structured their business models to obtain prohibited transaction relief under the FAB (which generally provides relief for investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards set forth in DOL's prior rule that was vacated by the Fifth Circuit).
As discussed in our prior Advisory, in connection with the Final Investment Advice Exemption DOL is repealing a prior DOL Advisory Opinion (known as the "Deseret Letter") that had held that a financial institution did not, in most cases, act as a fiduciary in connection with rolling over ERISA plan or IRA assets to an account at the financial institution. Under DOL's new interpretation, some (but not all) rollover transactions now will be considered to involve fiduciary investment advice. Unless modified by the incoming Administration, this change occurs on February 16, 2021. Given the short transition period for the repeal of the Deseret Letter, any financial institution that structured its business in reliance on the Deseret Letter should consider now whether changes should be made to its business practices for rollover transactions.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.