On June 29, 2020, the Department of Labor (DOL) released a proposed prohibited transaction exemption for investment advice fiduciaries that is based on the Department’s temporary policy adopted after a 2018 ruling by the Fifth Circuit Court of Appeals vacated the DOL’s 2016 fiduciary rule package.

The proposed exemption would allow investment advice fiduciaries — registered investment advisers, broker-dealers, insurance companies, banks and individual investment professionals that are their employees or agents — to provide a wider range of retirement options if they abide by the DOL’S Impartial Conduct Standards, which have three components:

  1. A best interest standard;
  2. A reasonable compensation standard; and
  3. A requirement to make no materially misleading statements.

These standards align with those found in the Securities and Exchange Commission’s (SEC) Regulation Best Interest (“Reg BI”), which went into effect on June 30, 2020. Reg BI — also known as Rule 151-1 of the Securities Exchange Act of 1934 — applies to the code of conduct for broker-dealers and their staff when making recommendations to retail customers regarding securities transactions, investment strategies, asset rollovers, and other related business. Reg BI requires that these recommendations be based on a customer’s best interest.

“The proposed exemption would be broadly available to investment advice fiduciaries who adhere to a best interest standard and plainly inform retirement investors that they are acting as fiduciaries when making investment recommendations,” said Acting Assistant Secretary of Labor for the Employee Benefits Security Administration Jeanne Klinefelter Wilson. “The proposed exemption would authorize a wide range of investment advice models and relationships, consistent with the fundamental goal of ensuring that workers and retirees receive investment advice that is in their best interest.”

In addition, the DOL said that it is taking the ministerial action of amending the Code of Federal Regulations to execute the Fifth Circuit’s order, which effectively reinstated the Department’s “five-part test” as set forth in its 1975 regulation defining investment advice fiduciaries under the Code and the Employee Retirement Income Security Act (ERISA). The court’s order also had the effect of reinstating the Department’s Interpretive Bulletin 96-1 regarding participant investment education.

We help our clients stay on top of the legislative and regulatory changes that apply to their businesses, and ensuring that their benefit plans and processes are updated to stay in compliance. To learn more, call our team of responsive ERISA counsel today at 678-439-6236.

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