On June 29, 2020, the Department of Labor (DOL) proposed new guidance regulating the conduct of financial advisors with respect to advice given to individuals regarding the investment of their retirement funds. The DOL’s prior attempt to regulate conduct of advisors to individuals with respect to their retirement funds has a storied history. In 2016, the DOL released an expansive rule which established that advice given to an individual regarding rolling over retirement plan assets was, itself, fiduciary advice under the Employee Retirement Security Act (ERISA), and was subject to a number of substantive and administrative requirements. After a significant compliance effort by many such advisors, multiple legal challenges finally resulted in the rule being vacated.

The technical amendment to the prior rule formalizes the removal of the 2016 rule. Simultaneously, the DOL revised several existing prohibited transaction class exemptions (PTEs) which depended on the prior rule, and published a new exemption which documents requirements for actions of advisors to become completely exempt from the application of certain ERISA fiduciary standards.

The new guidance affirms that advice regarding the rollover of assets from a retirement plan may be fiduciary advice if it meets a five-part test set forth in DOL regulations which long preexisted the 2016 rule. Specifically:

• advice is rendered as to the value or advisability of investments,
• such advice is given on a regular basis,
• such advice is given pursuant to an agreement or understanding between the plan or individual and the advisor,
• the agreement or understanding provides that the advice will be the primary basis for actual decisions made, and
• the advice is individualized to the recipient of the advice.

However, under the new PTE, advice which meets that five-part test may still be exempt from ERISA coverage if the advisor meets the “Impartial Conduct Standards” established by the PTE. In order to be eligible for this relief, advisors will need to demonstrate that the advice given is in the best interest of the recipient. This standard is defined in a manner that generally conforms with similar existing guidance issued by the Securities and Exchange Commission (SEC). In addition, the PTE imposes a number of administrative requirements around disclosure of advisor status to advice-recipients and establishment of proper policies and procedures to mitigate the potential for conflicts of interest or self-dealing.

The PTE indicates that institutions or individuals that were convicted of certain specified crimes within the last ten years are ineligible to take advantage of the new PTE (and would, therefore, be subject to preexisting law regarding fiduciary conduct). Such institutions are provided with a one-year “wind-down” period to conform their operations to this requirement.

Advisors that have established policies and agreements based on the prior “best interest contract exemption” should review such documents to ensure that they conform to the new rules, and that opportunities for additional services explored.

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