DOL Finalizes Prohibited Transaction Exemption for Investment Advice

On December 15, 2020, the DOL issued the finalized prohibited transaction exemption 2020-02 for investment advice. As background, the DOL issued a final rule providing an amended fiduciary conflict of interest rule back in June 2020. At that time, the DOL also proposed this class exemption to go along with that final rule. (We discussed the final conflict of interest rule and the proposed class exemption in the July 7, 2020, edition of Compliance Corner.)

Under the class exemption, those that provide fiduciary investment advice (including rollover advice) can receive compensation for conflicted advice as long as they meet certain impartial conduct standards. This rule aligns the DOL’s rule with the SEC’s rule and provides the exemption if:

  • The investment advice is in the best interest of the retirement investor at the time it is made;
  • The compensation received is reasonable under ERISA 408(b)(2); and
  • The advice does not place the financial or other interests of the advising fiduciary before the interests of the investor.

The final exemption makes a number of changes to the proposed version. Specifically, the final exemption:

  • Narrows the recordkeeping requirements to allow only the DOL and the Department of the Treasury to obtain access to a financial institution’s records;
  • Revises the disclosure requirements to require a written disclosure to retirement investors on the specific reasons that a rollover recommendation was in their best interest;
  • Revises the retrospective review provision to provide that certification can be made by any senior executive officer, and not just the chief executive officer (as proposed); and
  • Adds a self-correction provision; and
  • Sets forth the DOL’s final interpretation of the five-part test used for determining investment advice fiduciary status.

The final prohibited transaction exemption will be effective beginning 60 days after the date of publication in the Federal Register. Plan sponsors should discuss this rule with their plan advisers.

Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees »