DOL Provides Transitional Relief for Investment Advice Rules

The U.S. Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) has issued Field Assistance Bulletin 2021-02, “Temporary Enforcement Policy on Prohibited Transactions Rules Applicable to Investment Advice Fiduciaries.”

For context, effective February 16 of this year, the DOL implemented an expanded definition of “fiduciary advice.” Experts say this new definition will cause many registered investment adviser (RIA) services that were previously considered non-fiduciary under the Employee Retirement Income Security Act (ERISA) to be subject to a fiduciary best interest standard of conduct moving forward.

In a related move, the DOL also established a new prohibited transaction exemption (PTE) for fiduciary advice, meant to allow advisers to provide guidance and collect compensation in more situations than they otherwise would have been able to under the expanded advice definition. Formally, this exemption is known as PTE 2020-02, “Improving Investment Advice for Workers & Retirees,” and is a new exemption under ERISA and the Internal Revenue Code (IRC) for fiduciaries who provide investment advice to ERISA-covered pension plans and individual retirement accounts (IRAs).

This exemption became effective on February 16, but the department provided transitional relief through this December 20, which relieved fiduciaries of the obligation to fully comply with many of the exemption’s conditions.

The DOL says it understands that the December 20 expiration date of the current transitional relief period poses practical difficulties for financial institutions. These institutions have expressed concern that they would incur significant additional costs to distribute disclosures because December 20 does not align with their regular distribution cycle for disclosures. They also have asserted that the expiration date would make it difficult to conduct the required retrospective review on a calendar-year basis. In addition, the DOL says, financial institutions maintain that they face significant challenges in implementing the rollover documentation and disclosure requirements in a sufficiently automated and systematic manner by the deadline and that these challenges and concerns may delay their ability to rely on the exemption as the department intended.  

Based on those concerns, the DOL says it has concluded it should provide additional transition relief. The newly issued FAB provides that from December 21 through January 31, 2022, the department will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently, and in good faith, to comply with the impartial conduct standards for transactions exempted in PTE 2020-02. Those impartial standards include working in clients’ best interest, with reasonable compensation and without misleading statements. In addition, the department says it will not treat such fiduciaries as if they were violating the applicable prohibited transaction rules.

Finally, the department will not enforce the specific documentation and disclosure requirements for rollovers in PTE 2020-02 through June 30, 2022. However, all other requirements of the exemption will be subject to full enforcement on February 1, 2022.

“The class exemption provides meaningful protections for individual investors and we continue to emphasize the importance of compliance,” says Acting Assistant Secretary of Labor for Employee Benefits Security Ali Khawar. “Based on concerns raised, we’ve concluded that providing additional transition relief for financial institutions that are working in good faith to build systems to comply with the exemption conditions is appropriate.”

The DOL says it will continue to review issues of fact, law and policy related to the exemption and, more generally, its regulation of fiduciary investment advice.