A Few Important Points About the DOL’s Fiduciary Actions

Carol McClarnon, a partner at Eversheds Sutherland, is among the many ERISA [Employee Retirement Income Security Act] attorneys who have spent the better part of the past week reading through the finalized prohibited transaction exemption (PTE) published by the Department of Labor (DOL).

For the most part, McClarnon says, the final version published by the DOL closely resembles the proposed version put forward this summer. This is to say the DOL has confirmed and formalized the return to the old “five-part test” used by the DOL for determining who is an investment advice fiduciary, while it has also finalized a prohibited transaction exemption tied directly to the Regulation Best Interest (Reg BI) standard implemented this year by the Securities and Exchange Commission (SEC).

McClarnon says these are both important developments that bring much-needed alignment to the regulatory frameworks in place at the DOL and the SEC. She expects, however, that some uncertainty could remain in the area of rollover advice, since it is not always clear that the provision of such advice will trigger the “regular basis” element of the five-part test.

One interesting development, in McClarnon’s view, is that the DOL has confirmed that a financial professional cannot simply write their way out of a functional fiduciary relationship. This point relates to the “mutual understanding” prong of the five-part test, she explains, which stipulates that two parties’ “reasonable understandings of their relationship” are critical to determining whether they have arrived at a mutual agreement, arrangement or understanding that the investment advice will serve as a primary basis for investment decisions.

Under the new framework, written statements disclaiming a mutual understanding or forbidding reliance on the advice as a primary basis for investment decisions are not determinative, McClarnon notes. However, such statements are likely going to be relevant to the determination of whether a mutual understanding exists. The DOL has also confirmed that determining whether a mutual understanding exists could involve the analysis of marketing materials and other communications in which financial institutions and investment professionals hold themselves out as trusted advisers.

Jason Roberts, CEO of the Pension Resource Institute and managing partner at Retirement Law Group, says one important difference between the final and proposed exemption language is the inclusion of self-correction opportunities. As Roberts explains, the final prohibited transaction exemption provides a self-correction mechanism so that certain violations will not cause the loss of exemptive relief.

“A violation will not result in the loss of the exemption if the violation did not result in investment losses to the retirement investor or the financial institution made the retirement investor whole for any resulting losses,” he explains. “The financial institution must also correct the violation and notify the DOL via email within 30 days of correction.”

Self-correction further requires that the conduct at issue be addressed no later than 90 days after the financial institution has learned of the violation or reasonably should have learned of the violation. Finally, the financial institution must notify the people responsible for conducting a retrospective compliance review during the applicable review cycle, and the violation and correction must be specifically set forth in the written report of the retrospective compliance review.

Roberts says advisers were also relieved to see another change in the final framework that clarifies the recordkeeping and disclosure requirements involved here.

“Essentially, the final framework has narrowed the recordkeeping and disclosure requirements to allow only the DOL and the Internal Revenue Service to request access to related compliance documents and the files that would support compliance policies and procedures,” he explains. “Previously, plan sponsors, participants and beneficiaries could all have requested copious amounts of books and records from the regulated institutions. They can still access this information via a formal court order or something like discovery in the case of a trial—but there is no private right of action inherently to go after these documents for private investors. That’s an important development.”