Last week, the U.S. Department of Labor (the “DOL”) on December 15, 2020 issued a release (the “Release”) finalizing an important new initiative for retirement accounts (“Plans”) that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) or Section 4975 of the Internal Revenue Code of 1986 (the “Code”). The Release finalizes Prohibited Transaction Class Exemption (“PTCE”) 2020-2, which provides an exemption from ERISA’s and the Code’s prohibited transaction rules for individuals and institutions that wish to assert they are (or otherwise are at risk of being) fiduciaries by virtue of providing “investment advice” as defined under ERISA or Section 4975 of the Code (“Investment Advice”) to Plans and that also intend to offer them financial products and services. The Release is also important because it sets forth in the Release’s preamble the DOL’s views regarding certain aspects of what makes one an Investment Advice fiduciary. Our OnPoint on the proposed version of PTCE 2020-2 (the “Proposed Exemption”) can be found here.
By way of brief background, the original 1975 Investment Advice Regulation (the “1975 Rule”), which had stood for over 40 years, had been substantially amended in 2016 under the prior presidential administration. The 1975 Rule sets forth a five-part test (“Five-Part Test”) under which one may be considered an Investment Advice fiduciary. The path to finalization of 2016’s amended rule (the “2016 Rule”) was extremely circuitous, and the 2016 Rule was ultimately vacated in 2018 by the U.S. Court of Appeals for the Fifth Circuit.1 In connection with the release of the Proposed Exemption, the DOL expressly reinstated the 1975 Rule, and also reinstated Interpretative Bulletin (“IB”) 96-1, which relates to what is considered investment education (as opposed to Investment Advice) and which had been superseded when the 2016 Rule was finalized. The DOL also continued in effect certain transition relief (discussed below) that had been contained in Field Assistance Bulletin (“FAB”) 2018-02.
The Release gives rise to at least three broad important considerations:
- Change in Administration, Impacts to Effective Date and Scheduled Revocation of FAB 2018-02. PTCE 2020-2 is the product of the outgoing presidential Administration, and it is scheduled to become effective on February 16, 2021, after the presidential changeover. The Release provides that FAB 2018-02, a temporary enforcement policy providing prohibited transaction exemption relief to Investment Advice fiduciaries following the revocation of the 2016 Rule, will no longer be available beginning December 20, 2021. In FAB 2018-02, the DOL generally stated it would not pursue prohibited transaction claims against Investment Advice fiduciaries who work to comply with the “impartial conduct standards” that had been set forth in the now-vacated exemptive relief issued in connection with the 2016 Rule. The effective date of PTCE 2020-2 is after the upcoming Presidential inauguration, and it is thus uncertain whether the new administration will leave PTCE 2020-2 in place, delay its effectiveness, withdraw it or otherwise. Additional considerations may also apply in respect of FAB 2018-02.
- DOL’s Interpretation of Five-Part Test and Impact on Rollovers. The preamble to the Proposed Exemption contained extensive (and in some quarters unexpected) color on the DOL’s thinking about key elements of the Five-Part Test, including with respect to rollovers. While the Release generally makes clear that the DOL is standing by its commentary in the Proposed Exemption’s preamble, there are some additional nuances in the Release’s preamble. The DOL stated that the Five-Part Test gives “a clear roadmap for determining when they are, and are not, [Investment Advice] fiduciaries.”
- The Conditions of the Final Exemption. The Final Exemption retains the basic framework of the Proposed Exemption. But there are some important changes, including with respect to the Proposed Exemption’s certification requirements and a new provision under which financial institutions will be able to correct certain violations of the exemption under specific conditions.
We expect in the coming weeks to have an extensive OnPoint on the Release with further and more in-depth analysis.
1 Chamber of Commerce v. US Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018).