DOL Delivers Final Fiduciary Investment Advice Rule

April 15, 2016

Last week, the U.S. Department of Labor (DOL) issued a final rule revamping the standards for determining when a party is a fiduciary with respect to an ERISA retirement plan or an individual retirement account (IRA) by virtue of providing investment advice for a fee. Because the new rule substantially expands existing standards, a broader range of brokers, insurance agents, advisers and financial service providers now will be treated as fiduciaries and therefore subject to ERISA’s fiduciary responsibility requirements (and certain related tax rules applicable to IRAs). In connection with this change, the DOL has also issued new and revised prohibited transaction class exemptions that permit providers of fiduciary investment advice to continue to receive certain forms of compensation and engage in certain transactions without violating applicable prohibited transaction rules. The final rule presents broad ranging implications for financial service providers, as well as for employers, plan fiduciaries and IRA owners who contract for their services.

Referred to as the “conflict of interest” rule for retirement investments, the final rule is substantially similar in approach and scope to the rule the DOL proposed in 2015. However, the DOL has made some important modifications to the rule as proposed, which it has summarized in a chart.

The final rule generally becomes effective on April 10, 2017. Certain aspects of the prohibited transaction class exemptions will be phased-in and not fully effective until January 1, 2018.

Links to the final rule and the prohibited transaction class exemptions can be found on the Web page of the DOL’s Employee Benefits Security Administration.


Under ERISA, and under certain provisions of the Internal Revenue Code (Code) applicable to IRAs,* a party is a fiduciary of a retirement plan or IRA if that party renders investment advice for a fee or other compensation (direct or indirect) with respect to moneys or other property of that plan or IRA. Regulations implementing this rule were first adopted by the DOL in 1975.

Over time, the DOL became concerned that the existing regulation made it too difficult to treat an investment adviser as a fiduciary, and therefore permitted many investment advisers to engage in certain practices that fiduciaries are generally prohibited by ERISA and corollary Code provisions from engaging in, such as tailoring advice to affect the amount of compensation the advisor would receive for that advice. As a result, the DOL initiated a project in 2010 to replace the existing regulation with a new rule that, in its view, “better protects plans, participants, beneficiaries and IRA owners from conflicts of interest, imprudence and disloyalty” in the provision of investment advice. The final rule issued last week represents the culmination of that project.

The New Investment Advice Standard

The final rule replaces a multi-part test under existing regulation with a significantly more expansive and less conditional standard. The new test for determining fiduciary status based on provision of investment advice focuses on (1) whether certain types of advice have been provided for a fee or other compensation (directly or indirectly) and (2) whether the advice was provided in connection with certain types of relationships. These considerations are discussed below.

Investment Advice

The final rule treats a party as providing “investment advice” if it renders any of the following general categories of recommendations for a fee or other compensation (either direct or indirect):

  • A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging securities or other investment property;
  • A recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred or distributed from the plan or IRA;
  • A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or
  • Recommendations with respect to rollovers, distributions, or transfers from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.

For this purpose, a “recommendation” is broadly defined as any “communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” This standard is intended to be applied objectively, and the more individually tailored the advice the more likely it will be characterized as a recommendation. In the DOL’s view, actions which may not individually constitute a recommendation can be a recommendation when viewed in the aggregate, and it makes no difference whether the recommendation was initiated by a person or a computer program. However, as discussed below, certain types of investment-related actions directed to retirement plans and IRAs are specifically excluded from the definition of “recommendation” and thus generally would not cause a party engaged in one of those activities to be a fiduciary solely on account of that activity. Those excluded categories of activities are discussed in the section below entitled “Activities Not Constituting Investment Advice.”

The final rule clarifies that “investment property” for purposes of the new test does not include health or disability insurance policies, term life insurance policies or other types of assets that do not have an investment component. In addition, consistent with the proposed rule, the final rule supersedes existing DOL guidance and specifically categorizes as fiduciary investment advice a recommendation as to distribution options available to a plan participant or IRA owner.** The DOL indicates that investment advice can include a recommendation to take a distribution or to rollover to an IRA, as well as recommendations to not take a distribution but instead to leave retirement assets in a plan. However, advising a plan participant or IRA owner about the Code’s required minimum distribution rules would not constitute investment advice so long as that advice did not also include an investment recommendation.

Observation: A number of commenters on the proposed rule noted the heightened risk for employers that third-party service providers retained to perform certain plan functions (such as operating participant call centers) could be deemed through their communications to have provided investment advice to participants. The DOL notes than an employer’s mere retention of a service provider who “crosses the line” into providing investment advice to participants would not cause the employer to become an investment advice fiduciary. However, the DOL cautions that employers have a fiduciary duty to prudently select and monitor service providers, and that improper selection or monitoring could potentially give rise to co-fiduciary liability under ERISA. The final rule thus presents a new range of considerations for employers in retaining and in monitoring any provider of participant communication services, including compliance with the final “investment education” exception discussed below.

The DOL has also clarified that a party does not provide investment advice merely by advertising its investment advice or investment management services (or the services of others affiliated with that party), provided that the marketing activity does not include other advice which would be investment advice under the test. Finally, in a departure from the proposed rule, the final rule does not deem the providing of appraisals, fairness opinions or valuations to be investment advice. However, the DOL has indicated that it may undertake a special project to address ESOP valuations because of compliance issues it has uncovered in connection with recent enforcement activity.

Advice Provider Relationship

The second part of the new test for finding that a party is an investment advice fiduciary is whether that party falls within one of several specified relationships to the recipient of the advice. Under this part of the test, a party providing the type of advice described above (either directly or indirectly, such as through an affiliate) is a fiduciary with respect to a retirement plan or IRA if advice provider:

  • Represents or acknowledges that it is a fiduciary under ERISA or the Code with respect to the investment advice it provides;
  • It renders the advice under an agreement, arrangement or understanding (either written or verbal) that the advice is based on the particular investment needs of the party receiving the advice; or
  • It directs its advice to a specific recipient or recipients and the advice relates to the “the advisability of a particular investment or management decision with respect to securities or other investment property of the IRA.”

The final rule clarifies that if a party (or an affiliate of that party) acknowledges that it is a fiduciary to a plan or IRA with respect to some other, non-investment advice activity (such as providing trustee services), that acknowledgment of fiduciary status with respect to non-investment related services is not treated as an acknowledgment that it is a fiduciary with respect to any investment related communications.

Receipt of Fee or Compensation

As noted above, a party providing investment advice must receive a fee or other compensation, either direct or indirect, for such advice in order for the party to be a fiduciary under ERISA and applicable Code provisions. The final rule continues to apply a very broad interpretation of this condition, as in the proposed rule. Under the final rule, any explicit fee or compensation from any source for the advice provided meets this condition, as well as any fee or compensation received from any source “in connection with or as a result of” the investment advice activity. The determination of whether a fee or compensation is paid “in connection with or as a result of” advice is based on whether the payment would not have been made but for the provision of advice. Examples of compensation that in the DOL’s view meets this test are fees paid by mutual funds to an investment adviser affiliate of the party providing advice, and the salary paid to employees of a call center if those employees in the performance of their jobs make investment recommendations to plan participants or IRA owners.

Activities Not Constituting Investment Advice

The final rule identifies four non-exclusive categories of activities that are not considered to involve a “recommendation” (as that term is described above) and thus generally would not cause the party engaging in that activity to be providing fiduciary investment advice.

  1. Providing an Investment Platform for Directed Investment. Recordkeepers and third-party administrators that offer a selection of investment alternatives to participant-directed individual account retirement plans (such as 401(k) plans) generally do not make investment recommendations under the final rule solely by making their platform available without regard to the individualized needs of the plan or its participants and beneficiaries. This exception is subject to certain conditions. First, the platform of investment vehicles must be offered to a plan fiduciary independent of the platform provider. Second, the platform provider must disclose in writing to the independent plan fiduciary that it is not intending to provide impartial investment advice or to give advice otherwise in a fiduciary capacity. In response to numerous comments from platform providers concerning the proposed rule, the DOL has clarified that the marketing and making available of platforms that are segregated based on objective criteria generally do not result in providing investment advice. However, the DOL cautions that some marketing techniques could constitute investment advice, such as where a platform provider communicates to an employer that the particular platform was designed for employers of that size and is appropriate for the employer’s plan.
  2. Platform Provider Investment Selection/Monitoring Services. Parties eligible to use the exception above for platform marketing may also provide, in connection with such marketing activity, certain other specific types of services that will not constitute investment advice. One of these activities is identifying investment alternatives that meet objective criteria established by the plan fiduciary, so long as the platform provider discloses in writing whether it has any financial interest in any of the designated investment alternatives and the “precise nature” of that interest. Another excepted activity is responding to RFPs or similar types of solicitations by or on behalf of a plan for information relating to a “limited or sample set of investment alternatives,” if the response is based only on the size of the employer or the plan, its current investment alternatives of both, and provided that the platform provider makes a similar written disclosure as to whether it has any financial interest in the investment alternatives and the precise nature of any such interest. Finally, a platform provider will not provide investment advice merely by providing to a retirement plan fiduciary objective financial data and comparisons with independent benchmarks.
  3. General Communications. In response to numerous comments on the proposed rule, the DOL clarified in the final rule that general communications that a reasonable person would not view as investment advice are not investment advice for purposes of the final rule. Examples given by the DOL of some communications that should meet this exception include general circulation newsletters, public media talk show commentary, remarks at widely attended speeches and conferences, general marketing materials and general data regarding financial markets.
  4. Investment Education. Since 1996, the DOL has formally recognized that certain classes of information provided to participants and beneficiaries in 401(k) and other types of ERISA participant-directed individual account plans are in the nature of investment education and not investment advice, and thus such information should not be treated as fiduciary investment advice. The proposed rule included a similar exception as under the 1996 guidance for information that is educational (i.e., plan information; general financial, investment and retirement information; asset allocation models; and interactive investment material). The final rule retains the exception with certain modifications. For example, the DOL expanded the scope of the 1996 exception to apply to IRAs and to ERISA plans that do not provide for participant-directed investment, and to cover communications to plan fiduciaries and IRA owners. The final rule also adds an explicit condition that the information cannot include any advice or recommendations concerning specific investment products, investment managers or the value of investments. Asset allocation models may not as a general rule include reference to any specific investment alternatives offered under the plan or IRA, and interactive investment materials may not reference specific distribution options or investment alternatives unless specified by the plan participant or IRA owner. However, a limited exception to this general rule allows for investment education provided to ERISA retirement plan participants (but not IRA owners) to identify specific investment alternatives and distribution options available under the plan if certain conditions are met, including disclosure requirements and oversight of the plan’s investment alternatives by a fiduciary independent of the person that developed or markets the investment alternative, or the asset allocation model or interactive materials. The DOL notes that because the exception is limited to the use of asset allocation models and interactive materials that relate to a plan’s designated investment alternatives, any specific investment alternatives available through a plan’s self-directed brokerage window are not covered by the exception.

Parties Not Treated as Investment Advice Fiduciaries

Similar to the proposed rule, the final rule exempts from fiduciary status certain parties that provide advice communications in connection with specific activities, so long as those parties do not otherwise represent or acknowledge that they are acting as an ERISA fiduciary. There is also an exception for certain parties that execute securities transactions for a plan or IRA, which has been carried over into the final rule from the existing regulation without modification.

  1. Parties that Engage in Transactions with Expert Plan Fiduciaries. This exception (generally referred to as the “seller’s exception”) applies to advice provided to a fiduciary of a plan or IRA who is independent of the provider of the advice and where the advice is in connection with an arm’s length sale, purchase, loan, exchange or other transaction related to the investment of securities or other investment property. There are a number of conditions that must be met before the transaction entered into may use this exception. First, the advice provider must know or reasonably believe that the independent fiduciary of the plan or IRA is a bank, insurance carrier, registered investment adviser, a registered broker-dealer, or an independent fiduciary that has responsibility for managing at least $50 million in total employee benefit plan assets (either of the plan involved in the transaction or of multiple plans on an aggregated basis). Second, the advice provider must know or reasonably believe that the independent fiduciary is capable of independently evaluating the investment risks associated with transaction. Third, the advice provider must inform the independent fiduciary that the advice provider is not providing impartial investment advice or giving advice in a fiduciary capacity, and must disclose its financial interests in the transaction. Fourth, the advice provider must know or reasonably believe that the independent fiduciary is a fiduciary under ERISA or the Code and is responsible for exercising independent judgment in evaluating the transaction. Finally, the advice provider cannot receive a fee or other compensation directly from the plan, plan participant, IRA or owner for the provision of the investment advice in connection with the transaction. The second and fourth conditions can be met by obtaining written representations from the plan or the independent fiduciary.
    • Observation. Advice provided in connection with sales activities directed to plans and IRAs that do not have such an independent fiduciary will generally need to be provided under the new “best interest contract” prohibited transaction class exemption in order for the provider to permissibly receive certain types of compensation.
  2. Swap Transaction Counterparties. Advice provided to a retirement plan by certain counterparties to a swap transaction with the plan is exempt under the final rule if the plan is represented by an independent fiduciary (regardless of the plan’s size or the assets the independent fiduciary has under management) and certain additional conditions are met. Among these conditions is a requirement that before any recommendation is provided regarding the transaction, the advice provider must obtain a written representation from the plan’s independent fiduciary that the independent fiduciary understands that the advice provider is not undertaking to provide impartial investment advice or give investment advice in a fiduciary capacity in connection with the transaction, and that the independent fiduciary is exercising independent judgment in evaluating the recommendation.
  3. Advice Provided by Employees. The DOL recognized in the proposed rule that the expanded fiduciary definition could potentially cause employees of a plan sponsor or of one of its affiliates to be treated as fiduciaries if they were engaged in advising the plan’s fiduciaries on plan investment matters (such as by developing reports and recommendations for plan investment committees), and that an explicit exception was appropriate in such circumstances. The final rule retains and moderately expands that exception. The new exception generally applies to employees of the sponsor of a retirement plan or an affiliate of such a sponsor, employees of the plan, employees of a union and employees of a plan fiduciary. If such employees provide advice to a plan fiduciary, to an employee (other than in their capacity as a plan participant) or independent contractor of the plan sponsor, affiliate or plan, their advice will not make them a fiduciary provided that they do not receive compensation in connection with the advice beyond the normal compensation for work performed for their employer. In addition, the exception covers advice provided by an employee in their capacity as an employee to a participant or beneficiary of the employer’s or an affiliate’s plan, so long as the employee’s job responsibilities do not involve giving investment advice, they are not registered to provide investment advice and the advice provided does not require such registration, and the employee receives no additional fee or compensation in connection with the advice to the plan participant or beneficiary, other than the normal compensation for the work they perform for the employer.

New Prohibited Transaction Class Exemptions

The final rule creates two new prohibited transaction class exemptions, as well as amends several existing class exemptions that are particularly relevant to broker-dealers and other investment advice fiduciaries.

Best Interest Contract Exemption

The finalized “best interest contract” exemption (BICE) will broadly provide relief from ERISA and Code prohibited transaction rules for the receipt of compensation by investment advice fiduciaries and their affiliated financial institutions for services provided in connection with the purchase, sale, or holding of investments by participants and beneficiaries, IRA owners, and “retail” fiduciaries of plans or IRAs (generally persons who hold or manage less than $50 million in assets, and are not banks, insurance carriers, registered investment advisers or broker dealers), including small plan sponsors (Retirement Investors).

The exemption is designed to address the issue that the receipt by a fiduciary adviser (or his or her financial institution) of certain types of compensation from a plan (such as a commission) or from third parties (such as 12b-1 fees, revenue sharing, sales loads, etc.) would typically violate the ERISA prohibited transaction restrictions against self-dealing because the amount or when such compensation is received by the fiduciary adviser would be affected by the advice the fiduciary adviser provides. Unlike the proposed rule, which restricted the exemption’s availability to a specified list of asset classes, the final rule provides that advice to invest in all asset classes is covered by the BICE.

With respect to IRAs and non-ERISA plans, financial institutions must agree that they and their investment advice fiduciaries will adhere to the BICE’s requirements in an enforceable, written contract. The DOL intends for this contract to be the cornerstone of the BICE, creating a basis upon which the Retirement Investor could enforce rights through a private lawsuit for breach of contract. Among the various items of information that must be incorporated into the contract are (1) an acknowledgement by the adviser and financial institution of fiduciary status under ERISA or the Code with respect to any investment recommendations and (2) their agreement to provide investment advice that is in the Retirement Investor’s “best interest” (Best Interest Standard).

Observation: This means that the adviser and financial institution must act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the Retirement Investor’s investment objectives, risk tolerance, financial circumstances and needs. The adviser would therefore be required to make its investment recommendations without consideration of its own interest, the interest of the financial institution or of their affiliates or any other party.

The terms of the contract may appear in a stand-alone document or may be incorporated into an investment advisory agreement, investment program agreement, account opening agreement, insurance or annuity contract or application, or similar document, or an amendment thereto. The Retirement Investor’s consent may be evidenced by handwritten or electronic signatures.

Observation: To ease compliance burdens, the BICE (i) provides that contract terms may be incorporated into account opening documents, similar commonly-used agreements with new customers, and master contracts covering multiple recommendations; (ii) permits reliance on a negative consent process with respect to certain existing contract holders; and (iii) provides a method of satisfying the BICE in the event that the Retirement Investor does not open an account with the adviser but nevertheless acts on the advice through other channels.

Advisers and financial institutions need not execute the contract before they make an investment recommendation. However, the contract must cover any advice given prior to the contract date in order for the BICE to apply to such advice. Unlike the proposed rule, there is no contract requirement for recommendations to Retirement Investors about investments in ERISA-covered plans.

Observation: Although written contracts are not required for fiduciary investment advice to Retirement Investors regarding investments in ERISA plans, certain requirements nevertheless must be met in order to satisfy the BICE, including a written statement acknowledging fiduciary status, adherence to the Best Interest Standard, and compliance with certain other disclosure requirements.

Like the proposed rule, the exemption also requires a number of disclosures to the Retirement Investor, including material conflicts of interest, a statement informing the Retirement Investor of its right to obtain complete information about all fees related to its investment, and a statement as to whether the financial institution offers any proprietary products or receives any third-party payments with respect to any underlying investments. The BICE also contains a number of additional conditions and requirements, such as prohibited contract terms and certain web- and transaction-based disclosure requirements that advisers and financial institutions must make.

Exemption for Principal Transactions in Certain Debt Securities

The final rule adds a new class exemption for principal transactions and riskless principal transactions in certain assets referred to as “principal trading assets.” The new class exemption permits a fiduciary investment adviser or financial institution to engage in the purchase or sale of certain recommended debt securities and other investments out of their own inventories to or from plans and IRAs. To obtain this relief, the adviser and financial institution would have to enter into a written contract similar to that required for the BICE under which they would acknowledge fiduciary status and agree to adhere to the Best Interest Standard. Like the BICE, there is no contract requirement for ERISA plans, though certain requirements, including adherence to the Best Interest Standard, apply. In addition, disclosure, recordkeeping and other requirements similar to those under the BICE will apply.

Amendments to Existing Prohibited Transaction Class Exemptions

PTE 75-1: Certain Transactions Involving Broker-Dealers, Reporting Dealers, and Banks

PTE 75-1 was granted shortly after ERISA’s passage to provide certainty over the extent to which ordinary transactions between broker-dealers and plans or IRAs would be subject to ERISA’s prohibited transaction rules. PTE 75-1 consists of five exemptions covering securities transactions with broker-dealers, reporting dealers, and banks. The final rule amends PTE 75-1 in the following ways:

  • Agency Transactions and Services. PTE 75-1, Part I(b) permitted certain non-fiduciary broker-dealers who are parties in interest or disqualified persons to a plan or IRA to effect certain securities transactions on behalf of such plan or IRA as agent, including clearance, settlement or custodial functions incidental to such transactions. Similarly, PTE 75-1, Part I(c) permitted such broker-dealers to also furnish advice regarding securities or other property. The final rule revokes these two provisions because they are duplicated by the exemptive relief provided under Code Section 4975(d)(2), ERISA Section 408(b)(2) and the regulations thereunder, which clarified the scope of relief for service providers to plans and IRAs.
  • Principal Transactions. PTE 75-1, Part II relates to principal transactions and generally permits the purchase or sale of securities between a plan and registered broker-dealers, reporting dealers, or banks, provided such entities are not fiduciaries. It contained a limited exception in Part II(2) for mutual fund transactions, in which certain fiduciaries could act as principals in selling mutual fund shares to plans and IRAs and to receive commissions for doing so. The final rule revoked Part II(2) because identical relief is incorporated into PTE 86-128, which contains additional safeguards that make the exemption more consistent with recent exemptions that similarly provide broad relief from fiduciary self-dealing and conflicts of interest (see below).
  • Underwritings. Plans often purchase underwritten securities in public offerings because the pricing is usually more favorable than the net cost of the plan for the same securities in the secondary market immediately following the public offering. PTE 75-1, Part III generally permits a fiduciary to cause a plan or IRA to purchase securities from a member of an underwriting syndicate other than the fiduciary, when the fiduciary also is a member of such syndicate. The final rule requires any fiduciary relying on this exemption to comply with the Best Interest Standard, among other requirements. The existing exemption otherwise remains in place.
  • Market-Making. Many financial institutions that offer investment advice to plans and IRAs also regularly maintain markets in securities (directly or indirectly). PTE 75-1, Part IV generally permits a plan or IRA to purchase securities in a principal transaction from a fiduciary that is a “market-maker” with respect to such securities. Like the amendments to PTE 75-1, Part III, the final rule requires any fiduciary relying on this exemption to comply with the Best Interest Standard, among other requirements. The existing exemption otherwise remains in place.
  • Extensions of Credit. PTE 75-1, Part V generally permits the extension of credit to a plan or IRA by a broker-dealer in connection with the settlement of certain securities transactions (e.g., short sales, options contracts, and the purchasing of securities on margin). However, it does not permit the receipt of compensation for an extension of credit by broker-dealers that are fiduciaries with respect to the assets involved in the transaction. The final rule amends PTE 75-1, Part V to permit investment advice fiduciaries to receive compensation when they lend money or otherwise extend credit to plans or IRAs to avoid the failure of a purchase or sale of a security as long as the potential failure of the purchase or sale is not caused by the fiduciary or its affiliate, the credit terms are at least as favorable to the plan or IRA as otherwise available in an arm’s length transaction between unaffiliated person, and certain disclosures are provided to the plan or IRA.

PTE 84-24: Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies and Investment Company Principal Underwriters

PTE 84-24 permits insurance agents, insurance brokers, insurance companies and pension consultants that are fiduciaries to purchase insurance or annuity contracts for a plan or IRA and to receive commissions on the sales. It also permits mutual fund principal underwriters that are fiduciaries to sell mutual fund shares to plans or IRAs and to receive commissions on those sales. The final rule requires any fiduciary relying on this exemption to comply with the Best Interest Standard, among other requirements. It also more specifically defines the types of payments that are permitted under the exemption and revises its disclosure and recordkeeping requirements.

PTE 86-128: Securities Transactions Involving Broker-Dealers

PTE 86-128 generally provides an exemption for certain fiduciaries and their affiliates to receive fees from plans or IRAs for effecting or executing securities transactions as agents on behalf of plans or IRAs, but only if trading is not excessive in frequency or amount. It also permits certain “agency cross transactions,” in which the fiduciary acts as agent both for the plan or IRA and for another party (and to receive reasonable compensation from the other party). The final rule requires any fiduciary relying on this exemption to comply with the Best Interest Standard, among other requirements. It also requires investment advice fiduciaries to IRAs to obtain relief under the BICE instead of PTE 86-128, thereby ensuring that IRA owners will have contract-based claims to hold their investment advisers accountable, if need be.

As discussed above, the final rule adds a new Section I(b) to PTE 86-128 providing relief for a broker-dealer fiduciary to use its authority to cause a plan or IRA to purchase mutual fund shares from such fiduciary, when the shares are acquired solely to cover the plan or IRA’s prior order, and for the receipt of a commission by such fiduciary in connection with the transaction. Since this relief adds a new section to PTE 86-128, the final rule revokes PTE 75-1, Part II(2).

The final rule provides a new recordkeeping requirement for a fiduciary engaging in a transaction covered by this exemption to maintain records necessary to determine whether the exemption’s conditions have been met.

Other PTE Amendments

The following class exemptions were also amended by the final rule to require fiduciaries to comply with the Best Interest Standard:

  • PTE 77-4, which generally provides relief for a plan’s or IRA’s purchase or sale of open-end investment company shares where the investment adviser for such company is also a fiduciary to the plan or IRA.
  • PTE 80-83, which generally provides relief for a fiduciary causing a plan or IRA to purchase a security when the proceeds of the securities issuance may be used by the issuer to retire or reduce indebtedness to the fiduciary or an affiliate.
  • PTE 83-1, which generally provides relief for the sale of certificates in an initial issuance by the sponsor of a mortgage pool to a plan or IRA, when the sponsor, trustee, or insurer of the mortgage pool is a fiduciary with respect to the plan or IRA assets invested in such certificates.

Compliance Dates

The final rule becomes effective April 10, 2017 – one year after publication of the final rule in the Federal Register. The DOL believes this is adequate time for plans and their affected financial services and other service providers to adjust to the basic change from non-fiduciary to fiduciary status. Also, the DOL has adopted a “phased” implementation approach for the BICE and the Principal Transaction Exemption so that firms will have more time to come into fully compliance. Specifically, the full disclosure provisions, the policies and procedures requirements, and the contract requirement do not go into full effect until January 1, 2018.

For further information, please contact either of the authors, Jeffrey R. Capwell and Robert B. Wynne, or any other member of the McGuireWoods employee benefits team.

*The final rule also applies to certain other types of tax-favored arrangements not subject to ERISA, such as health savings accounts, medical savings accounts and education savings accounts. For purposes of this summary, references to IRAs also generally include these other types of non-ERISA arrangements. Retirement plans not subject to ERISA, such as governmental plans and certain 403(b) plans, are not subject to the final rule.

**See DOL Advisory Opinion 2005-23A (Dec. 7, 2005), which specifically states that distribution-related advice generally is not investment advice even if accompanied by a recommendation as to where the distribution should be invested (such as a recommendation to roll over an account balance from an employer retirement plan to an IRA and invest it in a specific product offered by the IRA provider).