Employee Benefits Security Administration Rule: Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees

WASHINGTON, Dec. 21 -- The Employee Benefits Security Administration has issued a rule (29 CFR 2550), published in the Federal Register on Dec. 18, entitled: "Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees".

The rule was issued by Jeanne Klinefelter Wilson, Acting Assistant Secretary, Employee Benefits Security, Administration, U.S. Department of Labor.

DATES: The exemption is effective as of: February 16, 2021.

FOR FURTHER INFORMATION CONTACT: Susan Wilker, telephone (202) 693-8557, or Erin Hesse, telephone (202) 693-8546, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (these are not toll-free numbers).

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This document contains a class exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974, as amended (the Act).

Title I of the Act codified a prohibited transaction provision in title 29 of the U.S. Code (referred to in this document as Title I). Title II of the Act codified a parallel provision now found in the Internal Revenue Code of 1986, as amended (the Code).

These prohibited transaction provisions of Title I and the Code generally prohibit fiduciaries with respect to "plans," including workplace retirement plans (Plans) and individual retirement accounts and annuities (IRAs), from engaging in self-dealing and receiving compensation from third parties in connection with transactions involving the Plans and IRAs.

The provisions also prohibit purchasing and selling investments with the Plans and IRAs when the fiduciaries are acting on behalf of their own accounts (principal transactions).

This exemption allows investment advice fiduciaries to plans under both Title I and the Code to receive compensation, including as a result of advice to roll over assets from a Plan to an IRA, and to engage in principal transactions, that would otherwise violate the prohibited transaction provisions of Title I and the Code.

The exemption applies to Securities and Exchange Commission--and state-registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that are investment advice fiduciaries.

The exemption includes protective conditions designed to safeguard the interests of Plans, participants and beneficiaries, and IRA owners.

The class exemption affects participants and beneficiaries of Plans, IRA owners, and fiduciaries with respect to such Plans and IRAs.

This notice also sets forth the Department's final interpretation of when advice to roll over Plan assets to an IRA will be considered fiduciary investment advice under Title I and the Code.

SUPPLEMENTARY INFORMATION:

Background

The Employee Retirement Income Security Act of 1974 (the Act) provides, in relevant part, that a person is a fiduciary with respect to a "plan" to the extent he or she renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so. Title I of the Act (referred to herein as Title I), which generally applies to employer-sponsored Plans (Title I Plans), includes this provision in section 3(21)(A)(ii).[1] The Act's Title II (referred to herein as the Code), includes a parallel provision in section 4975(e)(3)(B), which defines a fiduciary of a tax-qualified plan, including IRAs.[2]

In 1975, the Department issued a regulation establishing a five-part test for fiduciary status under this provision of Title I.[3] The 1975 regulation also applies to the definition of fiduciary in the Code, which is identical in its wording.[4] Under the 1975 regulation, for advice to constitute "investment advice," a financial institution or investment professional who is not a fiduciary under another provision of the statute must--(1) render advice 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 (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the Plan, Plan fiduciary or IRA owner, that (4) the advice will serve as a primary basis for investment decisions with respect to Plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the Plan or IRA. A financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under Title I and under the Code.

Investment advice fiduciaries, like other fiduciaries to Plans and IRAs, are subject to duties and liabilities established in Title I and the Code. Fiduciaries to Title I Plans must act prudently and with undivided loyalty to the plans and their participants and beneficiaries. Although these statutory fiduciary duties are not in the Code, both Title I and the Code contain provisions forbidding fiduciaries from engaging in certain specified "prohibited transactions," involving Plans and IRAs, including conflict of interest transactions.[5] Under these prohibited transaction provisions, a fiduciary may not deal with the income or assets of a Plan or an IRA in his or her own interest or for his or her own account, and a fiduciary may not receive payments from any party dealing with the Plan or IRA in connection with a transaction involving assets of the Plan or IRA. The Department has authority in ERISA section 408(a) and Code section 4975(c)(2) to grant administrative exemptions from the prohibited transaction provisions in Title I and the Code.[6]

In 2016, the Department finalized a new regulation that would have replaced the 1975 regulation, and granted new associated prohibited transaction exemptions.[7] After the U.S. Court of Appeals for the Fifth Circuit vacated that rulemaking, including the new exemptions, in Chamber of Commerce of the United States v. U.S. Department of Labor in 2018 (the Chamber opinion),[8] the Department issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy providing prohibited transaction relief to investment advice fiduciaries.9 In the FAB, the Department stated it would not pursue prohibited transaction claims against investment advice fiduciaries who worked diligently and in good faith to comply with "Impartial Conduct Standards" for transactions that would have been exempted in the new exemptions, or treat the fiduciaries as violating the applicable prohibited transaction rules. The Impartial Conduct Standards have three components: A best interest standard; a reasonable compensation standard; and a requirement to make no misleading statements about investment transactions and other relevant matters.

On July 7, 2020, the Department proposed this class exemption, which took into consideration the public correspondence and comments received by the Department since February 2017 and responded to informal industry feedback seeking an administrative class exemption based on FAB 2018-02.[10] On the same day, the Department issued a technical amendment to 29 CFR 2510-3.21, instructing the Office of the Federal Register to remove language that was added in 2016 and reinsert the text of the 1975 regulation.[11] This ministerial action reflected the Fifth Circuit's vacatur of the 2016 fiduciary rule.[12] The technical amendment also reinserted into the CFR Interpretive Bulletin 96-1 relating to participant investment education, which had been removed and largely incorporated into the text of the 2016 fiduciary rule.[13] The Department received 106 written comments on the proposed exemption, and on September 3, 2020, held a public hearing at which the commenters were permitted to give additional testimony.[14]

After careful consideration of the comments and testimony on the proposed exemption, the Department is granting the exemption. While the final exemption makes a number of significant changes in response to comments, it retains the proposal's broad protective framework, including the Impartial Conduct Standards; disclosures, including a written acknowledgment of fiduciary status; policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest; and a retrospective compliance review. The exemption, like the proposal, also specifies the circumstances in which Financial Institutions and Investment Professionals are ineligible to rely upon its terms.

In response to commenters, the Department made a number of important changes. First, the final exemption's recordkeeping requirements have been narrowed to allow only the Department and the Department of the Treasury to obtain access to a Financial Institution's records as opposed to plan fiduciaries and other Retirement Investors. Second, the final exemption's disclosure requirements have been revised to include written disclosure to Retirement Investors of the reasons that a rollover recommendation was in their best interest. Third, the final exemption's retrospective review provision has been revised to provide that certification can be made by any Senior Executive Officer, as defined in the exemption, rather than requiring certification by the chief executive officer (or equivalent officer) as proposed. Fourth, a self-correction provision has also been added to the final exemption.

This document also sets forth the Department's final interpretation of the five-part test of investment advice fiduciary status for purposes of this exemption, and provides the Department's views on when advice to roll over Title I Plan assets to an IRA will be considered fiduciary investment advice under Title I and the Code.[15] Comments on the interpretation, which was proposed in the notice of proposed exemption, are discussed below.

The Department has also provided explanation in the preamble to respond to issues raised during the comment period. Additionally, to the extent public comments were based on concerns about compliance and interpretive issues with the final exemption or the Act, the Department intends to support Financial Institutions, Investment Professionals, plan sponsors and fiduciaries, and other affected parties, with compliance assistance following publication of the final exemption.

The Department further announces that FAB 2018-02 will remain in effect until December 20, 2021. This will provide a transition period for parties to develop mechanisms to comply with the provisions in the new exemption.

The Department grants this exemption, which was proposed on its own motion, pursuant to its authority under ERISA section 408(a) and Code section 4975(c)(2) and in accordance with procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)). The Department finds that the exemption is administratively feasible, in the interests of Plans and their participants and beneficiaries and of IRA owners, and protective of the rights of participants and beneficiaries of Plans and IRA owners. The Department has determined that the exemption is an Executive Order (E.O.) 13771 deregulatory action because it provides broader and more flexible exemptions that allow investment advice fiduciaries with respect to Plans and IRAs to receive compensation and engage in certain principal transactions that would otherwise be prohibited under Title I and the Code.

Overview of the Final Exemption and Discussion of Comments Received

This exemption is available to registered investment advisers, broker-dealers, banks, and insurance companies (Financial Institutions) and their individual employees, agents, and representatives (Investment Professionals) that provide fiduciary investment advice to Retirement Investors.[16] The exemption defines Retirement Investors as Plan participants and beneficiaries, IRA owners, and Plan and IRA fiduciaries.[17] Under the exemption, Financial Institutions and Investment Professionals can receive a wide variety of payments that would otherwise violate the prohibited transaction rules, including, but not limited to, commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties. The exemption's relief extends to prohibited transactions arising as a result of investment advice to roll over assets from a Plan to an IRA, as detailed later in this exemption. The exemption also allows Financial Institutions to engage in principal transactions with Plans and IRAs in which the Financial Institution purchases or sells certain investments from its own account.

As noted above, Title I and the Code include broad prohibitions on self-dealing. Absent an exemption, a fiduciary may not deal with the income or assets of a Plan or an IRA in his or her own interest or for his or her own account, and a fiduciary may not receive payments from any party dealing with the Plan or IRA in connection with a transaction involving assets of the Plan or IRA. As a result, fiduciaries who use their authority to cause themselves or their affiliates[18] or related entities[19] to receive additional compensation violate the prohibited transaction provisions unless an exemption applies.[20]

This exemption conditions relief on the Investment Professional and Financial Institution investment advice fiduciaries providing advice in accordance with the Impartial Conduct Standards. In addition, the exemption requires Financial Institutions to acknowledge in writing their and their Investment Professionals' fiduciary status under Title I and the Code, as applicable, when providing investment advice to the Retirement Investor, and to describe in writing the services to be provided and the Financial Institutions' and Investment Professionals' material conflicts of interest. Financial Institutions must document the reasons that a rollover recommendation is in the best interest of the Retirement Investor and provide that documentation to the Retirement Investor. Financial Institutions are required to adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and conduct a retrospective review of compliance. The exemption also provides, subject to additional safeguards, relief for Financial Institutions to enter into principal transactions with Retirement Investors, in which they purchase or sell certain investments from their own accounts.

In order to ensure that Financial Institutions provide reasonable oversight of Investment Professionals and adopt a culture of compliance, the exemption provides that Financial Institutions and Investment Professionals will be ineligible to rely on the exemption if, within the previous 10 years, they were convicted of certain crimes arising out of their provision of investment advice to Retirement Investors. They will also be ineligible if they engaged in systematic or intentional violation of the exemption's conditions or provided materially misleading information to the Department in relation to their conduct under the exemption. Ineligible parties are permitted to rely on an otherwise available statutory exemption or administrative class exemption, or they can apply for an individual prohibited transaction exemption from the Department. This targeted approach of allowing the Department to give special attention to parties with certain criminal convictions or with a history of egregious conduct with respect to compliance with the exemption will provide meaningful protections for Retirement Investors.

While the exemption's eligibility provision provides an incentive to maintain an appropriate focus on compliance with legal requirements and with the exemption, it does not represent the only available enforcement mechanism. The Department has investigative and enforcement authority with respect to transactions involving Plans under Title I of ERISA, and it has interpretive authority as to whether exemption conditions have been satisfied. Further, ERISA section 3003(c) provides that the Department will transmit information to the Secretary of the Treasury regarding a party's violation of the prohibited transaction provisions of ERISA section 406. In addition, participants, beneficiaries, and fiduciaries with respect to Plans covered under Title I have a statutory cause of action under ERISA section 502(a) for fiduciary breaches and prohibited transactions under Title I. The exemption, however, does not expand Retirement Investors' ability to enforce their rights in court or create any new legal claims above and beyond those expressly authorized in Title I or the Code, such as by requiring contracts and/or warranty provisions.

Exemption Approach and Alignment With Other Regulators' Conduct Standards

This exemption provides relief that is broader and more flexible than the other prohibited transaction exemptions currently available for investment advice fiduciaries. Those exemptions generally provide relief to specific types of financial services providers, for discrete, specifically identified transactions, and often do not extend to compensation arrangements that developed after the Department first granted the exemptions.[21] In comparison, this new exemption provides relief for multiple categories of Financial Institutions and Investment Professionals, and extends broadly to their receipt of reasonable compensation as a result of the provision of fiduciary investment advice. The conditions are principles-based rather than prescriptive, so as to apply across different financial services sectors and business models. The exemption provides additional certainty regarding covered compensation arrangements and avoids the complexity associated with requiring a Financial Institution to rely upon a patchwork of different exemptions when providing investment advice.

The exemption's principles-based approach is rooted in the Impartial Conduct Standards for fiduciaries providing investment advice. The Impartial Conduct Standards include a best interest standard, a reasonable compensation standard, and a requirement to make no misleading statements about investment transactions and other relevant matters. In the proposed exemption, the Department noted that the best interest standard was based on concepts of law and equity "developed in significant part to deal with the issues that arise when agents and persons in a position of trust have conflicting interests," and accordingly, the standard is well-suited to the problems posed by conflicted investment advice.[22] The Department believes that conditioning the exemption on satisfaction of the Impartial Conduct Standards protects the interests of Retirement Investors in connection with this broader grant of exemptive relief.

The best interest standard in the exemption is broadly aligned with recent rulemaking by the Securities and Exchange Commission (SEC), in particular. On June 5, 2019, the SEC finalized a regulatory package relating to conduct standards for broker-dealers and investment advisers. The package included Regulation Best Interest which establishes a best interest standard applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.[23] The SEC also issued an interpretation of the fiduciary conduct standards applicable to investment advisers under the Investment Advisers Act of 1940 (SEC Fiduciary Interpretation).[24] In addition, as part of the package, the SEC adopted new Form CRS, which requires broker-dealers and SEC-registered investment advisers to provide retail investors with a short relationship summary with specified information (SEC Form CRS).[25]

The exemption's best interest standard is also aligned with the standard included in the National Association of Insurance Commissioners (NAIC)'s Suitability in Annuity Transactions Model Regulation (NAIC Model Regulation) which was updated in Spring 2020.[26] The model regulation provides that all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumer's interest. Both Iowa and Arizona have adopted updated rules following the update of the NAIC Model Regulation.[27]

Some commenters expressed general support for the approach taken in the proposed exemption, although they opposed certain specific conditions as discussed in greater detail below. Commenters cited the flexible, principles-based approach rather than a prescriptive approach to exemptive relief, and they also praised the proposed exemptive relief for a broad range of otherwise prohibited compensation types which they said did not favor certain market segments or arrangements. Many of these commenters supported what they viewed as the proposed exemption's alignment with regulatory conduct standards under the securities laws, particularly Regulation Best Interest. The commenters said this approach would reduce compliance costs and burdens, which will ultimately benefit Retirement Investors through reduced fees. Commenters also stated that they believed the exemption's approach would facilitate providing investment advice to Retirement Investors through a wide variety of methods.

Some commenters urged the Department to more closely mirror Regulation Best Interest or offer an explicit safe harbor for compliance with Regulation Best Interest, or with any "primary financial regulator" of the Financial Institution, rather than including additional conditions in the exemption. They argued that otherwise Financial Institutions would have to comply with two differing yet mostly redundant regimes, with their attendant additional costs and liability exposure, and that the Department had failed to show that Retirement Investors would be insufficiently protected by other regulators' standards. Some commenters focused on conduct standards, disclosures, and policies and procedures as areas for increased alignment, which they said would further reduce compliance burdens. These comments, as they pertain to these particular aspects of the exemption, are discussed in greater detail below in their respective parts of the preamble.

Commenters made similar points with respect to alignment with the NAIC Model Regulation. Some commenters asked the Department to go further in aligning the exemption's terms to the NAIC Model Regulation, or even offer a safe harbor based on compliance with it. Commenters asserted that increased alignment is particularly important to allow for distribution of insurance products by independent insurance agents. Specifically, commenters expressed the view that the exemption establishes a structure of Financial Institution oversight for Investment Professionals that is incompatible with the independent agent distribution model, because independent insurance agents sell the products of more than one insurance company. They suggested that the NAIC Model Regulation better accommodated that business model.

In contrast, many commenters opposed the approach taken in the proposed exemption as insufficiently protective of Retirement Investors, and urged the Department to withdraw the proposal. Some of these commenters expressed the view that the exemption would not satisfy the statutory criteria under ERISA section 408(a) for the granting of an exemption or, more generally, that the conditions would not protect Plans and IRAs and their participants and beneficiaries from the dangers of conflicts of interest and self-dealing.

These commenters focused much of their opposition on the exemption's alignment with Regulation Best Interest and the NAIC Model Regulation, which the commenters said do not encompass a "true" fiduciary standard. Commenters stated that the provisions of Regulation Best Interest and the NAIC Model Regulation restricting conflicts of interest do not sufficiently protect investors from conflicted investment advice. Furthermore, commenters stated that the Act was enacted to provide additional protections to individuals saving for retirement, above and beyond existing laws. Some commenters noted that at the time the Act was enacted, Congress was aware of other federal and state regulatory schemes and that there was no suggestion of congressional purpose to base compliance on federal securities laws or other regulatory schemes.

Some commenters took the position that the alignment with the conduct standards in Regulation Best Interest rendered many of the exemption's other conditions, which are designed to support investment advice that meets the standards, too lax. Some commenters also opposed the breadth of the exemption. These commenters suggested that the exemption should not allow receipt of payments from third parties. Some commenters also opposed the exemption's application to recommendations of proprietary products. Further, commenters also stated that the failure to provide a mechanism for IRA owners to enforce the Impartial Conduct Standards was a significant flaw in the exemption's approach. Some of these commenters noted that the Department also lacks the authority to enforce the exemption with respect to these investors.

The Department has carefully considered these comments on the exemption's approach, its alignment with other regulators' conduct standards, as well as the comments on specific provisions of the exemption discussed below. The Department has proceeded with granting the final exemption based on the view that the exemption will provide important protections to Retirement Investors in the context of a principles-based exemption that permits a broad range of otherwise prohibited compensation, including compensation from third parties and from proprietary products.

In this regard, the Impartial Conduct Standards are strong fiduciary standards based on longstanding concepts in the Act and the common law of trusts. The exemption includes additional supporting conditions including a written acknowledgment of fiduciary status to ensure that the nature of the relationship is clear to Financial Institutions, Investment Professionals, and Retirement Investors; policies and procedures that require mitigation of conflicts of interest to the extent that a reasonable person reviewing the policies and procedures and incentive practices as a whole would conclude that they do not create an incentive for a Financial Institution or Investment Professional to place their interests ahead of the interest of the Retirement Investor; and documentation and disclosure to Retirement Investors of the reasons that a rollover recommendation is in the Retirement Investor's best interest.

The exemption does not include a provision permitting IRA owners to enforce the Impartial Conduct Standards. In developing the exemption, the Department was mindful of the Fifth Circuit's Chamber opinion holding that the Department did not have authority to include certain contract requirements in the new exemptions enforceable by IRA owners as granted by the 2016 fiduciary rulemaking. In addition, the Department intends to avoid any potential for disruption in the market for investment advice that may occur related to a contract requirement. Instead, the exemption includes many protective measures and targeted opportunities for the Department to review compliance within its existing oversight and enforcement authority under the Act. For example, Financial Institutions' reports regarding their retrospective review are required to be certified by a Senior Executive Officer[28] of the Financial Institution and provided to the Department within 10 business days of request. The exemption also includes eligibility provisions, discussed below, which the Department believes will encourage Financial Institutions and Investment Professionals to maintain an appropriate focus on compliance with legal requirements and with the exemption.

The Department believes that general alignment with the other regulators' conduct standards is beneficial in allowing for the development of compliance structures that lack complexity and unnecessary burden. The Department has not, however, offered a safe harbor based solely on compliance with regulatory conduct standards under federal or state securities laws. The Department disagrees with commenters' arguments that the failure to do so will create a redundant, cost-ineffective regime, or one that could create unexpected liabilities at the edges. This exemption is offered as a deregulatory option for interested parties; it does not unilaterally impose any obligations. The additional conditions of the exemption provide important protections to Retirement Investors, who are investing through tax advantaged accounts and are the subject of unique protections under Title I and the Code.[29] The approach in the final exemption exemplifies the Department's important role in protecting Retirement Investors through promulgating only those exemptions that meet the requirements of ERISA section 408(a) and Code section 4975(c)(2).

For the same reasons, the Department likewise declines to provide a safe harbor based on the NAIC Model Regulation. A uniform approach to safeguards for Retirement Investors receiving fiduciary investment advice in the insurance marketplace is particularly important given the potential for variation across state insurance laws. Moreover, although commenters expressed concern about the scope of an insurance company's supervisory oversight responsibilities as a Financial Institution, the Department believes that the exemption is workable for the insurance industry, as discussed in greater detail below.

Some commenters raised questions as to whether the Department intends to defer to the SEC or other regulators on enforcement and how the Department will treat violations under other regulatory regimes. The Department has worked with other regulatory agencies, including the SEC, in numerous cases that implicate violations under different laws. The interaction of findings or settlements in parallel suits or investigations is decidedly a case-by-case determination. The Department confirms that it will coordinate with other regulators, including the SEC, on enforcement strategies and will harmonize regimes to the extent possible, but will not defer to other regulators on enforcement under the Act. Retirement Investors who have concerns about whether they have received investment advice that is not in accordance with the Impartial Conduct Standards or other conditions of the exemption are encouraged to contact the Department.[30]

Interpretation of Fiduciary Investment Advice in Connection With Rollover Recommendations

As stated in the proposed exemption, amounts accrued in a Title I Plan can represent a lifetime of savings, and often comprise the largest sum of money a worker has at retirement. Therefore, the decision to roll over assets from a Title I Plan to an IRA is potentially a very consequential financial decision for a Retirement Investor.[31] A sound decision on the rollover will typically turn on numerous factors, including the relative costs associated with the new investment options, the range of available investment options under the plan and the IRA, and the individual circumstances of the particular investor.

Rollovers from Title I Plans to IRAs are expected to approach $2.4 trillion cumulatively from 2016 through 2020.[32] These large sums of money eligible for rollover represent a significant revenue source for investment advice providers. A firm that recommends a rollover to a Retirement Investor can generally expect to earn transaction-based compensation such as commissions, or an ongoing advisory fee, from the IRA, but may or may not earn compensation if the assets remain in the Title I Plan.

In light of potential conflicts of interest related to rollovers from Title I Plans to IRAs, Title I and the Code prohibit an investment advice fiduciary from receiving fees resulting from investment advice to Title I Plan participants to roll over assets from the plan to an IRA, unless an exemption applies. The exemption provides relief, as needed, for this prohibited transaction, if the Financial Institution and Investment Professional provide investment advice that satisfies the Impartial Conduct Standards and comply with the other applicable conditions discussed below.[33] In particular, the Financial Institution is required to document the reasons that the advice to roll over was in the Retirement Investor's best interest, and provide the documentation to the Retirement Investor.

The preamble to the proposed exemption provided the Department's proposed views on when advice to roll over Plan assets to an IRA should be considered fiduciary investment advice under the Department's regulation defining fiduciary investment advice,[34] and requested comment on all aspects of the interpretation. The proposed interpretation addressed both Advisory Opinion 2005-23A (the Deseret Letter) as well as the facts and circumstances analysis of rollover recommendations under the five-part test. The discussion also touched on the statutory definitional prerequisite that advice be provided "for a fee or other compensation, direct or indirect." Comments on the proposed interpretation are discussed below. The Department has carefully considered these comments and has adopted the final interpretation, as follows.

Deseret Letter

The proposed exemption announced that, in determining the fiduciary status of an investment advice provider in the context of advice to roll over Title I Plan assets to an IRA, the Department does not intend to apply the analysis in the Deseret Letter stating that advice to roll assets out of a Title I Plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice with respect to the Title I Plan. The Department believes that the analysis in the Deseret Letter was incorrect when it stated that advice to take a distribution of assets from a Title I Plan is not advice to sell, withdraw, or transfer investment assets currently held in the plan. A recommendation to roll assets out of a Title I Plan is necessarily a recommendation to liquidate or transfer the plan's property interest in the affected assets and the participant's associated property interest in plan investments.[35] Typically the assets, fees, asset management structure, investment options, and investment service options all change with the decision to roll money out of a Title I Plan. Moreover, a distribution recommendation commonly involves either advice to change specific investments in the Title I Plan or to change fees and services directly affecting the return on those investments. Accordingly, the better view is that a recommendation to roll assets out of a Title I Plan is advice with respect to moneys or other property of the plan. An investment advice fiduciary making a rollover recommendation would be required to avoid prohibited transactions under Title I and the Code unless an exemption, including this one, applies.

Some commenters supported the Department's announcement that it would not apply the reasoning of the Deseret Letter but would rather approach the analysis of rollovers based on all the facts and circumstances under the five-part test. These commenters generally supported the possibility that rollover recommendations could be considered fiduciary investment advice if the five-part test is satisfied, particularly given the consequence of the decision to roll over large sums typically accumulated in a Retirement Investor's workplace Plan.

Some commenters stated the Department's proposed interpretation did not go far enough in protecting Retirement Investors, and that all rollover recommendations should be deemed fiduciary investment advice regardless of whether the five-part test is satisfied. Commenters noted that financial professionals have adopted titles such as financial consultant, financial planner, and wealth manager. These commenters stated that reinsertion of the five-part test makes it all too easy for financial services providers to hold themselves out as acting in positions of trust and confidence, even as they effectively avoided fiduciary status by relying on the "regular basis," "mutual agreement, arrangement, or understanding" and "primary basis" prongs of the test.[36] One commenter argued that a rollover recommendation should be viewed as always satisfying the "regular basis" prong because, in its view, there are two distinct steps--the decision to do a rollover, and the decision to invest its proceeds.

Other commenters asserted that the facts-and-circumstances analysis would lead to uncertainty as to fiduciary status and that a consequence of that uncertainty is a potential reduction in access to advice. One commenter argued that would lead to more leakage, missing participants, and abandoned accounts. Commenters disagreed with the conclusion that rollover recommendations typically include investment recommendations. Many commenters expressed concern that the Department intended to apply the facts and circumstances analysis to transactions occurring in the past. They said the Department's statement that it would no longer apply the reasoning in the Deseret Letter would expose financial services providers to liability for transactions entered into in the past. Some commenters asked for additional guidance on other types of interactions, including recommendations to increase contributions to a Plan.

After careful consideration of these comments, the Department has determined that, consistent with the position taken in the proposal, the facts and circumstances analysis required by the five-part test applies to rollover recommendations. A recommendation to roll assets out of a Title I Plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the five-part test, constitutes fiduciary investment advice. This outcome is more aligned with both the facts and circumstances approach taken by Congress in drafting the Act's statutory functional fiduciary test, and with an approach centered on whether the parties have entered into a relationship of trust and confidence.[37] This outcome is also consistent with the Act's goal of protecting the interests of Retirement Investors given the central importance to investors' retirement security consequences of a decision to roll over Title I Plan assets.

The Department agrees that not all rollover recommendations can be considered fiduciary investment advice under the five-part test set forth in the Department's regulation. Parties can and do, for example, enter into one-time sales transactions in which there is no ongoing investment advice relationship, or expectation of such a relationship. If, for example, a participant purchases an annuity based upon a recommendation from an insurance agent without receiving subsequent, ongoing advice, the advice does not meet the "regular basis" prong as specifically required by the regulation.[38] Nor is the Department persuaded by the commenter who suggested that a rollover transaction should always satisfy the regular basis prong on the grounds that it can be viewed as involving two separate steps--the rollover and a subsequent investment decision. These two steps do not, in and of themselves, establish a regular basis.

The Department does not believe that its interpretation will lead to loss of access to investment advice due to uncertainty of financial services providers as to their fiduciary status. Taken together, the five-part test as interpreted here and Interpretive Bulletin 96-1, regarding participant investment education, provide Financial Institutions and Investment Professionals a clear roadmap for when they are, and are not, Title I and Code fiduciaries. Since the exemption provides prohibited transaction relief for rollover recommendations that do constitute fiduciary investment advice, Financial Institutions and Investment Professionals would be free to provide fiduciary investment advice and comply with the exemption to avoid a prohibited transaction. In this regard, some commenters specifically supported the proposed exemption as facilitating investment advice and options for consumers. Alternatively, financial services providers can choose not to provide fiduciary investment advice and have no need of this exemption. And, of course, the Department acknowledges some commenters' observations that Retirement Investors may choose on their own to withdraw assets from a Title I Plan and roll over funds to an IRA; however, this exemption focuses on the interests of those Retirement Investors who do receive fiduciary investment advice. The Department further addresses concerns regarding purported uncertainty over whether certain relationships meet the prongs of the five-part test, including the "regular basis" and "mutual agreement" prongs, later in this preamble.

Some commenters stated that the Department should have engaged in notice and comment prior to announcing that it would no longer apply the analysis in the Deseret Letter. Commenters said that the position in the Deseret Letter contributed to a longstanding understanding of the five-part test which should be reversed only through the regulatory process. A commenter noted that, in 2016, the Department characterized the 2016 fiduciary rule as "superseding" the Deseret Letter, and asserted that characterization as evidence that the Department's procedure in this exemption proceeding is inadequate.

The Department does not believe these comments have merit. Advisory opinions, such as the Deseret Letter, are interpretive statements that were not subject to the notice and comment process. As such, the Department need not go through notice and comment to offer a new interpretation of the regulation based on a better reading of governing statutory and regulatory authority, as here.[39] Moreover, in this instance, the statements made in the preamble to the now-vacated 2016 fiduciary rule are also unpersuasive as to the effect of the Deseret Letter for the same reasons. Rather than take the 2016 fiduciary rule's approach of removing the five-part test through an amendment to the Code of Federal Regulations and, thus, "superseding" the Deseret Letter, the Department now is only changing its view on the Deseret Letter (and specifically, one aspect of it). The five-part test still applies without the Deseret Letter, as it did for decades before the letter. The 2016 fiduciary rule is not in effect, and statements made in the preamble to the vacated rule bear no weight. And, in this instance, the Department solicited and has had the benefit of public comment on its interpretation through the notice and comment process for the exemption. Comments regarding the Department's compliance with Executive Order 13891 are addressed later in this preamble.

Nevertheless, in response to commenters expressing concern about the possibility of being held liable for past transactions that would not have been treated as fiduciary under the Deseret analysis, the Department will not pursue claims for breach of fiduciary duty or prohibited transactions against any party, or treat any party as violating the applicable prohibited transaction rules, for the period between 2005, when the Deseret Letter was issued, and February 16, 2021, based on a rollover recommendation that would have been considered non-fiduciary conduct under the reasoning in the Deseret Letter. The Department recognizes that advisory opinions issued under ERISA Procedure 76-1, while directly applicable only to their requester, see ERISA Procedure 76-1 section 10, can also constitute "a body of experience and informed judgment to which the courts and litigants may properly resort for guidance." Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 18 (2004) (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). For this reason, and because the Department does not wish to disturb the reliance interests of those who looked to the Deseret Letter for guidance, the Department also does not expect or intend a private right of action to be viable for a transaction conducted in reliance on the Deseret Letter prior to that date. Further, the extension of the temporary enforcement policy in FAB 2018-02 until its expiration on December 20, 2021 will allow parties a transition period during which the Department will not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with the Impartial Conduct Standards for rollover recommendations or treat such fiduciaries as violating the applicable prohibited transaction rules.40 Additionally, although the Department declines to set broad guidelines in this preamble for what is necessarily a facts-and-circumstances determination about particular business practices, to the extent public comments were based on concerns about compliance and interpretive issues with the final exemption or the Act, the Department intends to support Financial Institutions, Investment Professionals, plan sponsors and fiduciaries, and other affected parties with compliance assistance following publication of the final exemption.

Jeanne Klinefelter Wilson,

Acting Assistant Secretary, Employee Benefits Security, Administration, U.S. Department of Labor.

[FR Doc. 2020-27825 Filed 12-17-20; 8:45 am]

BILLING CODE 4510-29-P

The document is published in the Federal Register: https://www.federalregister.gov/documents/2020/12/18/2020-27825/prohibited-transaction-exemption-2020-02-improving-investment-advice-for-workers-and-retirees

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