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

Federal RegisterDec 18, 2020

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application No. D-12011]

ZRIN 1210-ZA29

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

AGENCY:

Employee Benefits Security Administration, U.S. Department of Labor.

ACTION:

Adoption of class exemption and interpretation.

SUMMARY:

This document contains a class exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974, as amended (the Act). Title I of the Act codified a prohibited transaction provision in title 29 of the U.S. Code (referred to in this document as Title I). Title II of the Act codified a parallel provision now found in the Internal Revenue Code of 1986, as amended (the Code). These prohibited transaction provisions of Title I and the Code generally prohibit fiduciaries with respect to “plans,” including workplace retirement plans (Plans) and individual retirement accounts and annuities (IRAs), from engaging in self-dealing and receiving compensation from third parties in connection with transactions involving the Plans and IRAs. The provisions also prohibit purchasing and selling investments with the Plans and IRAs when the fiduciaries are acting on behalf of their own accounts (principal transactions). This exemption allows investment advice fiduciaries to plans under both Title I and the Code to receive compensation, including as a result of advice to roll over assets from a Plan to an IRA, and to engage in principal transactions, that would otherwise violate the prohibited transaction provisions of Title I and the Code. The exemption applies to Securities and Exchange Commission—and state-registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that are investment advice fiduciaries. The exemption includes protective conditions designed to safeguard the interests of Plans, participants and beneficiaries, and IRA owners. The class exemption affects participants and beneficiaries of Plans, IRA owners, and fiduciaries with respect to such Plans and IRAs. This notice also sets forth the Department's final interpretation of when advice to roll over Plan assets to an IRA will be considered fiduciary investment advice under Title I and the Code.

DATES:

The exemption is effective as of: February 16, 2021.

FOR FURTHER INFORMATION CONTACT:

Susan Wilker, telephone (202) 693-8557, or Erin Hesse, telephone (202) 693-8546, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (these are not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The Employee Retirement Income Security Act of 1974 (the Act) provides, in relevant part, that a person is a fiduciary with respect to a “plan” to the extent he or she renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so. Title I of the Act (referred to herein as Title I), which generally applies to employer-sponsored Plans (Title I Plans), includes this provision in section 3(21)(A)(ii).

The Act's Title II (referred to herein as the Code), includes a parallel provision in section 4975(e)(3)(B), which defines a fiduciary of a tax-qualified plan, including IRAs.

Section 3(21)(A)(ii) of the Act is codified at 29 U.S.C. 1002(3)(21)(A)(ii). As noted above, Title I of the Act was codified in Title 29 of the U.S. Code. As a matter of practice, this preamble refers to the codified provisions in Title I by reference to the sections of ERISA, as amended, and not by its numbering in the U.S. Code.

As noted above, Title II of the Act was codified in the Internal Revenue Code.

In 1975, the Department issued a regulation establishing a five-part test for fiduciary status under this provision of Title I.

The 1975 regulation also applies to the definition of fiduciary in the Code, which is identical in its wording.

Under the 1975 regulation, for advice to constitute “investment advice,” a financial institution or investment professional who is not a fiduciary under another provision of the statute must—(1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the Plan, Plan fiduciary or IRA owner, that (4) the advice will serve as a primary basis for investment decisions with respect to Plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the Plan or IRA. A financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under Title I and under the Code.

29 CFR 2510.3-21(c)(1), 40 FR 50842 (October 31, 1975).

26 CFR 54.4975-9(c), 40 FR 50840 (October 31, 1975).

Investment advice fiduciaries, like other fiduciaries to Plans and IRAs, are subject to duties and liabilities established in Title I and the Code. Fiduciaries to Title I Plans must act prudently and with undivided loyalty to the plans and their participants and beneficiaries. Although these statutory fiduciary duties are not in the Code, both Title I and the Code contain provisions forbidding fiduciaries from engaging in certain specified “prohibited transactions,” involving Plans and IRAs, including conflict of interest transactions.

Under these prohibited transaction provisions, a fiduciary may not deal with the income or assets of a Plan or an IRA in his or her own interest or for his or her own account, and a fiduciary may not receive payments from any party dealing with the Plan or IRA in connection with a transaction involving assets of the Plan or IRA. The Department has authority in ERISA section 408(a) and Code section 4975(c)(2) to grant administrative exemptions from the prohibited transaction provisions in Title I and the Code.

ERISA section 406 and Code section 4975.

Cf.

Code section 4975(f)(5), which defines “correction” with respect to prohibited transactions as placing a Plan or an IRA in a financial position not worse than it would have been in if the person had acted “under the highest fiduciary standards.”

Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 1 (2018)) generally transferred the authority of the Secretary of the Treasury to grant administrative exemptions under Code section 4975 to the Secretary of Labor.

In 2016, the Department finalized a new regulation that would have replaced the 1975 regulation, and granted new associated prohibited transaction exemptions.

After the U.S. Court of Appeals for the Fifth Circuit vacated that rulemaking, including the new exemptions, in

Chamber of Commerce of the United States

U.S. Department of Labor

in 2018 (the

Chamber

opinion),

the Department issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy providing prohibited transaction relief to investment advice fiduciaries.

In the FAB, the Department stated it would not pursue prohibited transaction claims against investment advice fiduciaries who worked diligently and in good faith to comply with “Impartial Conduct Standards” for transactions that would have been exempted in the new exemptions, or treat the fiduciaries as violating the applicable prohibited transaction rules. The Impartial Conduct Standards have three components: A best interest standard; a reasonable compensation standard; and a requirement to make no misleading statements about investment transactions and other relevant matters.

See

Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20945 (Apr. 8, 2016).

885 F.3d 360 (5th Cir. 2018).

Available at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-

bulletins/2018-02.

The Impartial Conduct Standards incorporated in the FAB were conditions of the new exemptions granted in 2016.

See

Best Interest Contract Exemption, 81 FR 21002 (Apr. 8, 2016), as corrected at 81 FR 44773 (July 11, 2016).

On July 7, 2020, the Department proposed this class exemption, which took into consideration the public correspondence and comments received by the Department since February 2017 and responded to informal industry feedback seeking an administrative class exemption based on FAB 2018-02.

On the same day, the Department issued a technical amendment to 29 CFR 2510-3.21, instructing the Office of the Federal Register to remove language that was added in 2016 and reinsert the text of the 1975 regulation.

This ministerial action reflected the Fifth Circuit's vacatur of the 2016 fiduciary rule.

The technical amendment also reinserted into the CFR Interpretive Bulletin 96-1 relating to participant investment education, which had been removed and largely incorporated into the text of the 2016 fiduciary rule.

The Department received 106 written comments on the proposed exemption, and on September 3, 2020, held a public hearing at which the commenters were permitted to give additional testimony.

85 FR 40834 (July 7, 2020).

85 FR 40589 (July 7, 2020).

The amendment also corrected a typographical error in the original text of the 1975 regulation, at 29 CFR 2510-3.21(e)(1)(ii).

29 CFR 2509.96-1.

Hearing on Improving Investment Advice for Workers & Retirees, 85 FR 52292 (August 25, 2020).

After careful consideration of the comments and testimony on the proposed exemption, the Department is granting the exemption. While the final exemption makes a number of significant changes in response to comments, it retains the proposal's broad protective framework, including the Impartial Conduct Standards; disclosures, including a written acknowledgment of fiduciary status; policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest; and a retrospective compliance review. The exemption, like the proposal, also specifies the circumstances in which Financial Institutions and Investment Professionals are ineligible to rely upon its terms.

In response to commenters, the Department made a number of important changes. First, the final exemption's recordkeeping requirements have been narrowed to allow only the Department and the Department of the Treasury to obtain access to a Financial Institution's records as opposed to plan fiduciaries and other Retirement Investors. Second, the final exemption's disclosure requirements have been revised to include written disclosure to Retirement Investors of the reasons that a rollover recommendation was in their best interest. Third, the final exemption's retrospective review provision has been revised to provide that certification can be made by any Senior Executive Officer, as defined in the exemption, rather than requiring certification by the chief executive officer (or equivalent officer) as proposed. Fourth, a self-correction provision has also been added to the final exemption.

This document also sets forth the Department's final interpretation of the five-part test of investment advice fiduciary status for purposes of this exemption, and provides the Department's views on when advice to roll over Title I Plan assets to an IRA will be considered fiduciary investment advice under Title I and the Code.

Comments on the interpretation, which was proposed in the notice of proposed exemption, are discussed below.

For purposes of any rollover of assets from a Title I Plan to an IRA described in this preamble, the term “Plan” only includes an employee pension benefit plan described in ERISA section 3(2) or a plan described in Code section 4975(e)(1)(A), and the term “IRA” only includes an account or annuity described in Code section 4975(e)(1)(B) or (C).

The Department has also provided explanation in the preamble to respond to issues raised during the comment period. Additionally, to the extent public comments were based on concerns about compliance and interpretive issues with the final exemption or the Act, the Department intends to support Financial Institutions, Investment Professionals, plan sponsors and fiduciaries, and other affected parties, with compliance assistance following publication of the final exemption.

The Department further announces that FAB 2018-02 will remain in effect until December 20, 2021. This will provide a transition period for parties to develop mechanisms to comply with the provisions in the new exemption.

The Department grants this exemption, which was proposed on its own motion, pursuant to its authority under ERISA section 408(a) and Code section 4975(c)(2) and in accordance with procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)). The Department finds that the exemption is administratively feasible, in the interests of Plans and their participants and beneficiaries and of IRA owners, and protective of the rights of participants and beneficiaries of Plans and IRA owners. The Department has determined that the exemption is an Executive Order (E.O.) 13771 deregulatory action because it provides broader and more flexible exemptions that allow investment advice fiduciaries with respect to Plans and IRAs to receive compensation and engage in certain principal transactions that would otherwise be prohibited under Title I and the Code.

Overview of the Final Exemption and Discussion of Comments Received

This exemption is available to registered investment advisers, broker-dealers, banks, and insurance companies (Financial Institutions) and their individual employees, agents, and representatives (Investment Professionals) that provide fiduciary investment advice to Retirement Investors.

The exemption defines Retirement Investors as Plan participants and beneficiaries, IRA owners, and Plan and IRA fiduciaries.

Under the exemption, Financial Institutions and Investment Professionals can receive a wide variety of payments that would otherwise violate the prohibited transaction rules, including, but not limited to, commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties. The exemption's relief extends to prohibited transactions arising as a result of investment advice to roll over assets from a Plan to an IRA, as detailed later in this exemption. The

exemption also allows Financial Institutions to engage in principal transactions with Plans and IRAs in which the Financial Institution purchases or sells certain investments from its own account.

References in the preamble to registered investment advisers include both SEC- and state-registered investment advisers.

As defined in Section V(i) of the exemption, the term “Plan” means any employee benefit plan described in ERISA section 3(3) and any plan described in Code section 4975(e)(1)(A). In Section V(g), the term “Individual Retirement Account” or “IRA” is defined as any account or annuity described in Code section 4975(e)(1)(B) through (F), including an Archer medical savings account, a health savings account, and a Coverdell education savings account.

As noted above, Title I and the Code include broad prohibitions on self-dealing. Absent an exemption, a fiduciary may not deal with the income or assets of a Plan or an IRA in his or her own interest or for his or her own account, and a fiduciary may not receive payments from any party dealing with the Plan or IRA in connection with a transaction involving assets of the Plan or IRA. As a result, fiduciaries who use their authority to cause themselves or their affiliates

or related entities

to receive additional compensation violate the prohibited transaction provisions unless an exemption applies.

As defined in Section V(a) of the exemption, an “affiliate” includes: (1) Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Investment Professional or Financial Institution. (For this purpose, “control” means the power to exercise a controlling influence over the management or policies of a person other than an individual); (2) any officer, director, partner, employee, or relative (as defined in ERISA section 3(15)), of the Investment Professional or Financial Institution; and (3) any corporation or partnership of which the Investment Professional or Financial Institution is an officer, director, or partner.

As defined in Section V(j) of the exemption, a “related entity” is an entity that is not an affiliate, but in which the Investment Professional or Financial Institution has an interest that may affect the exercise of its best judgment as a fiduciary.

As articulated in the Department's regulations, “a fiduciary may not use the authority, control, or responsibility which makes such a person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary) to provide a service.” 29 CFR 2550.408b-2(e)(1).

This exemption conditions relief on the Investment Professional and Financial Institution investment advice fiduciaries providing advice in accordance with the Impartial Conduct Standards. In addition, the exemption requires Financial Institutions to acknowledge in writing their and their Investment Professionals' fiduciary status under Title I and the Code, as applicable, when providing investment advice to the Retirement Investor, and to describe in writing the services to be provided and the Financial Institutions' and Investment Professionals' material conflicts of interest. Financial Institutions must document the reasons that a rollover recommendation is in the best interest of the Retirement Investor and provide that documentation to the Retirement Investor. Financial Institutions are required to adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and conduct a retrospective review of compliance. The exemption also provides, subject to additional safeguards, relief for Financial Institutions to enter into principal transactions with Retirement Investors, in which they purchase or sell certain investments from their own accounts.

In order to ensure that Financial Institutions provide reasonable oversight of Investment Professionals and adopt a culture of compliance, the exemption provides that Financial Institutions and Investment Professionals will be ineligible to rely on the exemption if, within the previous 10 years, they were convicted of certain crimes arising out of their provision of investment advice to Retirement Investors. They will also be ineligible if they engaged in systematic or intentional violation of the exemption's conditions or provided materially misleading information to the Department in relation to their conduct under the exemption. Ineligible parties are permitted to rely on an otherwise available statutory exemption or administrative class exemption, or they can apply for an individual prohibited transaction exemption from the Department. This targeted approach of allowing the Department to give special attention to parties with certain criminal convictions or with a history of egregious conduct with respect to compliance with the exemption will provide meaningful protections for Retirement Investors.

While the exemption's eligibility provision provides an incentive to maintain an appropriate focus on compliance with legal requirements and with the exemption, it does not represent the only available enforcement mechanism. The Department has investigative and enforcement authority with respect to transactions involving Plans under Title I of ERISA, and it has interpretive authority as to whether exemption conditions have been satisfied. Further, ERISA section 3003(c) provides that the Department will transmit information to the Secretary of the Treasury regarding a party's violation of the prohibited transaction provisions of ERISA section 406. In addition, participants, beneficiaries, and fiduciaries with respect to Plans covered under Title I have a statutory cause of action under ERISA section 502(a) for fiduciary breaches and prohibited transactions under Title I. The exemption, however, does not expand Retirement Investors' ability to enforce their rights in court or create any new legal claims above and beyond those expressly authorized in Title I or the Code, such as by requiring contracts and/or warranty provisions.

Exemption Approach and Alignment With Other Regulators' Conduct Standards

This exemption provides relief that is broader and more flexible than the other prohibited transaction exemptions currently available for investment advice fiduciaries. Those exemptions generally provide relief to specific types of financial services providers, for discrete, specifically identified transactions, and often do not extend to compensation arrangements that developed after the Department first granted the exemptions.

In comparison, this new exemption provides relief for multiple categories of Financial Institutions and Investment Professionals, and extends broadly to their receipt of reasonable compensation as a result of the provision of fiduciary investment advice. The conditions are principles-based rather than prescriptive, so as to apply across different financial services sectors and business models. The exemption provides additional certainty regarding covered compensation arrangements and avoids the complexity associated with requiring a Financial Institution to rely upon a patchwork of different exemptions when providing investment advice.

See e.g.,

PTE 86-128, Class Exemption for Securities Transactions involving Employee Benefit Plans and Broker-Dealers, 51 FR 41686 (Nov. 18, 1986), as amended, 67 FR 64137 (Oct. 17, 2002) (providing relief for a fiduciary's use of its authority to cause a Plan or an IRA to pay a fee for effecting or executing securities transactions to the fiduciary, as agent for the Plan or IRA, and for a fiduciary to act as an agent in an agency cross transaction for a Plan or an IRA and another party to the transaction and receive reasonable compensation for effecting or executing the transaction from the other party to the transaction); PTE 84-24, Class Exemption for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters, 49 FR 13208 (Apr. 3, 1984), as corrected, 49 FR 24819 (June 15, 1984), as amended, 71 FR 5887 (Feb. 3, 2006) (providing relief for the receipt of a sales commission by an insurance agent or broker from an insurance company in connection with the purchase, with plan assets, of an insurance or annuity contract).

The exemption's principles-based approach is rooted in the Impartial Conduct Standards for fiduciaries providing investment advice. The Impartial Conduct Standards include a best interest standard, a reasonable compensation standard, and a requirement to make no misleading statements about investment transactions and other relevant matters.

In the proposed exemption, the Department noted that the best interest standard was based on concepts of law and equity “developed in significant part to deal with the issues that arise when agents and persons in a position of trust have conflicting interests,” and accordingly, the standard is well-suited to the problems posed by conflicted investment advice.

The Department believes that conditioning the exemption on satisfaction of the Impartial Conduct Standards protects the interests of Retirement Investors in connection with this broader grant of exemptive relief.

85 FR 40842.

The best interest standard in the exemption is broadly aligned with recent rulemaking by the Securities and Exchange Commission (SEC), in particular. On June 5, 2019, the SEC finalized a regulatory package relating to conduct standards for broker-dealers and investment advisers. The package included Regulation Best Interest which establishes a best interest standard applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.

The SEC also issued an interpretation of the fiduciary conduct standards applicable to investment advisers under the Investment Advisers Act of 1940 (SEC Fiduciary Interpretation).

In addition, as part of the package, the SEC adopted new Form CRS, which requires broker-dealers and SEC-registered investment advisers to provide retail investors with a short relationship summary with specified information (SEC Form CRS).

Regulation Best Interest: The Broker-Dealer Standard of Conduct, 84 FR 33318 (July 12, 2019) (Regulation Best Interest Release).

Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 FR 33669 (July 12, 2019).

Form CRS Relationship Summary; Amendments to Form ADV, 84 FR 33492 (July 12, 2019) (Form CRS Relationship Summary Release). In addition to the SEC's rulemaking, the Massachusetts Securities Division amended its regulations for broker-dealers to apply a fiduciary conduct standard, under which broker-dealers and their agents must “[m]ake recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.” 950 Mass. Code Regs. 12.204 & 12.207 as amended effective March 6, 2020.

The exemption's best interest standard is also aligned with the standard included in the National Association of Insurance Commissioners (NAIC)'s Suitability in Annuity Transactions Model Regulation (NAIC Model Regulation) which was updated in Spring 2020.

The model regulation provides that all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumer's interest. Both Iowa and Arizona have adopted updated rules following the update of the NAIC Model Regulation.

NAIC Suitability in Annuity Transactions Model Regulation, Spring 2020,

available at www.naic.org/store/free/MDL-275.pdf

(NAIC Model Regulation).

Iowa Code § 507B.48 (2020),

available at https://iid.iowa.gov/sites/default/files/bi_af.pdf;

Arizona Senate Bill 1557 (2020),

available at www.azleg.gov/legtext/54Leg/2R/laws/0090.pdf.

The New York State Department of Financial Services also amended its insurance regulations to establish a best interest standard in connection with life insurance and annuity transactions. New York State Department of Financial Services Insurance Regulation 187, 11 NYCRR 224, First Amendment, effective August 1, 2019 for annuity transactions.

Some commenters expressed general support for the approach taken in the proposed exemption, although they opposed certain specific conditions as discussed in greater detail below. Commenters cited the flexible, principles-based approach rather than a prescriptive approach to exemptive relief, and they also praised the proposed exemptive relief for a broad range of otherwise prohibited compensation types which they said did not favor certain market segments or arrangements. Many of these commenters supported what they viewed as the proposed exemption's alignment with regulatory conduct standards under the securities laws, particularly Regulation Best Interest. The commenters said this approach would reduce compliance costs and burdens, which will ultimately benefit Retirement Investors through reduced fees. Commenters also stated that they believed the exemption's approach would facilitate providing investment advice to Retirement Investors through a wide variety of methods.

Some commenters urged the Department to more closely mirror Regulation Best Interest or offer an explicit safe harbor for compliance with Regulation Best Interest, or with any “primary financial regulator” of the Financial Institution, rather than including additional conditions in the exemption. They argued that otherwise Financial Institutions would have to comply with two differing yet mostly redundant regimes, with their attendant additional costs and liability exposure, and that the Department had failed to show that Retirement Investors would be insufficiently protected by other regulators' standards. Some commenters focused on conduct standards, disclosures, and policies and procedures as areas for increased alignment, which they said would further reduce compliance burdens. These comments, as they pertain to these particular aspects of the exemption, are discussed in greater detail below in their respective parts of the preamble.

Commenters made similar points with respect to alignment with the NAIC Model Regulation. Some commenters asked the Department to go further in aligning the exemption's terms to the NAIC Model Regulation, or even offer a safe harbor based on compliance with it. Commenters asserted that increased alignment is particularly important to allow for distribution of insurance products by independent insurance agents. Specifically, commenters expressed the view that the exemption establishes a structure of Financial Institution oversight for Investment Professionals that is incompatible with the independent agent distribution model, because independent insurance agents sell the products of more than one insurance company. They suggested that the NAIC Model Regulation better accommodated that business model.

In contrast, many commenters opposed the approach taken in the proposed exemption as insufficiently protective of Retirement Investors, and urged the Department to withdraw the proposal. Some of these commenters expressed the view that the exemption would not satisfy the statutory criteria under ERISA section 408(a) for the granting of an exemption or, more generally, that the conditions would not protect Plans and IRAs and their participants and beneficiaries from the dangers of conflicts of interest and self-dealing.

These commenters focused much of their opposition on the exemption's alignment with Regulation Best Interest and the NAIC Model Regulation, which the commenters said do not encompass a “true” fiduciary standard. Commenters stated that the provisions of Regulation Best Interest and the NAIC Model Regulation restricting conflicts of interest do not sufficiently protect investors from conflicted investment advice. Furthermore, commenters stated that the Act was enacted to provide

additional

protections to individuals saving for retirement, above and beyond existing laws. Some commenters noted that at the time the Act was enacted, Congress was aware of other federal and state regulatory schemes and that there was no suggestion of congressional purpose to base compliance on federal securities laws or other regulatory schemes.

Some commenters took the position that the alignment with the conduct

standards in Regulation Best Interest rendered many of the exemption's other conditions, which are designed to support investment advice that meets the standards, too lax. Some commenters also opposed the breadth of the exemption. These commenters suggested that the exemption should not allow receipt of payments from third parties. Some commenters also opposed the exemption's application to recommendations of proprietary products. Further, commenters also stated that the failure to provide a mechanism for IRA owners to enforce the Impartial Conduct Standards was a significant flaw in the exemption's approach. Some of these commenters noted that the Department also lacks the authority to enforce the exemption with respect to these investors.

The Department has carefully considered these comments on the exemption's approach, its alignment with other regulators' conduct standards, as well as the comments on specific provisions of the exemption discussed below. The Department has proceeded with granting the final exemption based on the view that the exemption will provide important protections to Retirement Investors in the context of a principles-based exemption that permits a broad range of otherwise prohibited compensation, including compensation from third parties and from proprietary products.

In this regard, the Impartial Conduct Standards are strong fiduciary standards based on longstanding concepts in the Act and the common law of trusts. The exemption includes additional supporting conditions including a written acknowledgment of fiduciary status to ensure that the nature of the relationship is clear to Financial Institutions, Investment Professionals, and Retirement Investors; policies and procedures that require mitigation of conflicts of interest to the extent that a reasonable person reviewing the policies and procedures and incentive practices as a whole would conclude that they do not create an incentive for a Financial Institution or Investment Professional to place their interests ahead of the interest of the Retirement Investor; and documentation and disclosure to Retirement Investors of the reasons that a rollover recommendation is in the Retirement Investor's best interest.

The exemption does not include a provision permitting IRA owners to enforce the Impartial Conduct Standards. In developing the exemption, the Department was mindful of the Fifth Circuit's

Chamber

opinion holding that the Department did not have authority to include certain contract requirements in the new exemptions enforceable by IRA owners as granted by the 2016 fiduciary rulemaking. In addition, the Department intends to avoid any potential for disruption in the market for investment advice that may occur related to a contract requirement. Instead, the exemption includes many protective measures and targeted opportunities for the Department to review compliance within its existing oversight and enforcement authority under the Act. For example, Financial Institutions' reports regarding their retrospective review are required to be certified by a Senior Executive Officer

of the Financial Institution and provided to the Department within 10 business days of request. The exemption also includes eligibility provisions, discussed below, which the Department believes will encourage Financial Institutions and Investment Professionals to maintain an appropriate focus on compliance with legal requirements and with the exemption.

Senior Executive Officer is defined in Section V(l) as any of the following: The chief compliance officer, the chief executive officer, president, chief financial officer, or one of the three most senior officers of the Financial Institution.

The Department believes that general alignment with the other regulators' conduct standards is beneficial in allowing for the development of compliance structures that lack complexity and unnecessary burden. The Department has not, however, offered a safe harbor based solely on compliance with regulatory conduct standards under federal or state securities laws. The Department disagrees with commenters' arguments that the failure to do so will create a redundant, cost-ineffective regime, or one that could create unexpected liabilities at the edges. This exemption is offered as a deregulatory option for interested parties; it does not unilaterally impose any obligations. The additional conditions of the exemption provide important protections to Retirement Investors, who are investing through tax advantaged accounts and are the subject of unique protections under Title I and the Code.

The approach in the final exemption exemplifies the Department's important role in protecting Retirement Investors through promulgating only those exemptions that meet the requirements of ERISA section 408(a) and Code section 4975(c)(2).

See

ERISA section 2(a).

For the same reasons, the Department likewise declines to provide a safe harbor based on the NAIC Model Regulation. A uniform approach to safeguards for Retirement Investors receiving fiduciary investment advice in the insurance marketplace is particularly important given the potential for variation across state insurance laws. Moreover, although commenters expressed concern about the scope of an insurance company's supervisory oversight responsibilities as a Financial Institution, the Department believes that the exemption is workable for the insurance industry, as discussed in greater detail below.

Some commenters raised questions as to whether the Department intends to defer to the SEC or other regulators on enforcement and how the Department will treat violations under other regulatory regimes. The Department has worked with other regulatory agencies, including the SEC, in numerous cases that implicate violations under different laws. The interaction of findings or settlements in parallel suits or investigations is decidedly a case-by-case determination. The Department confirms that it will coordinate with other regulators, including the SEC, on enforcement strategies and will harmonize regimes to the extent possible, but will not defer to other regulators on enforcement under the Act. Retirement Investors who have concerns about whether they have received investment advice that is not in accordance with the Impartial Conduct Standards or other conditions of the exemption are encouraged to contact the Department.

Contact information for regional offices of the Department's Employee Benefits Security Administration is available at

www.dol.gov/agencies/ebsa/about-ebsa/about-us/regional-offices.

Interpretation of Fiduciary Investment Advice in Connection With Rollover Recommendations

As stated in the proposed exemption, amounts accrued in a Title I Plan can represent a lifetime of savings, and often comprise the largest sum of money a worker has at retirement. Therefore, the decision to roll over assets from a Title I Plan to an IRA is potentially a very consequential financial decision for a Retirement Investor.

A sound decision on the rollover will typically turn on numerous factors, including the relative costs associated with the new investment options, the range of available investment options under the

plan and the IRA, and the individual circumstances of the particular investor.

For simplicity, this preamble interpretation uses the term

Retirement Investor,

which is a defined term in the exemption. This is not intended to suggest that the interpretation is limited to Retirement Investors impacted by the class exemption. In this preamble interpretation, the term

Retirement Investor

is intended to refer more generally to Plan participants and beneficiaries and IRA owners.

Rollovers from Title I Plans to IRAs are expected to approach $2.4 trillion cumulatively from 2016 through 2020.

These large sums of money eligible for rollover represent a significant revenue source for investment advice providers. A firm that recommends a rollover to a Retirement Investor can generally expect to earn transaction-based compensation such as commissions, or an ongoing advisory fee, from the IRA, but may or may not earn compensation if the assets remain in the Title I Plan.

Cerulli Associates, “U.S. Retirement Markets 2019.”

In light of potential conflicts of interest related to rollovers from Title I Plans to IRAs, Title I and the Code prohibit an investment advice fiduciary from receiving fees resulting from investment advice to Title I Plan participants to roll over assets from the plan to an IRA, unless an exemption applies. The exemption provides relief, as needed, for this prohibited transaction, if the Financial Institution and Investment Professional provide investment advice that satisfies the Impartial Conduct Standards and comply with the other applicable conditions discussed below.

In particular, the Financial Institution is required to document the reasons that the advice to roll over was in the Retirement Investor's best interest, and provide the documentation to the Retirement Investor.

The exemption would also provide relief for investment advice fiduciaries under either Title I or the Code to receive compensation for advice to roll Plan assets to another Plan, to roll IRA assets to another IRA or to a Plan, and to transfer assets from one type of account to another, all limited to the extent such rollovers are permitted under applicable law. The analysis set forth in this section will apply as relevant to those transactions as well. For purposes of any rollover of assets between a Title I Plan and an IRA described in this preamble, the term “IRA” includes only an account or annuity described in Code section 4975(e)(1)(B) or (C).

The preamble to the proposed exemption provided the Department's proposed views on when advice to roll over Plan assets to an IRA should be considered fiduciary investment advice under the Department's regulation defining fiduciary investment advice,

and requested comment on all aspects of the interpretation. The proposed interpretation addressed both Advisory Opinion 2005-23A (the Deseret Letter) as well as the facts and circumstances analysis of rollover recommendations under the five-part test. The discussion also touched on the statutory definitional prerequisite that advice be provided “for a fee or other compensation, direct or indirect.” Comments on the proposed interpretation are discussed below. The Department has carefully considered these comments and has adopted the final interpretation, as follows.

29 CFR 2510-3.21.

Deseret Letter

The proposed exemption announced that, in determining the fiduciary status of an investment advice provider in the context of advice to roll over Title I Plan assets to an IRA, the Department does not intend to apply the analysis in the Deseret Letter stating that advice to roll assets out of a Title I Plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice with respect to the Title I Plan. The Department believes that the analysis in the Deseret Letter was incorrect when it stated that advice to take a distribution of assets from a Title I Plan is not advice to sell, withdraw, or transfer investment assets currently held in the plan. A recommendation to roll assets out of a Title I Plan is necessarily a recommendation to liquidate or transfer the plan's property interest in the affected assets and the participant's associated property interest in plan investments.

Typically the assets, fees, asset management structure, investment options, and investment service options all change with the decision to roll money out of a Title I Plan. Moreover, a distribution recommendation commonly involves either advice to change specific investments in the Title I Plan or to change fees and services directly affecting the return on those investments. Accordingly, the better view is that a recommendation to roll assets out of a Title I Plan is advice with respect to moneys or other property of the plan. An investment advice fiduciary making a rollover recommendation would be required to avoid prohibited transactions under Title I and the Code unless an exemption, including this one, applies.

Similarly, the SEC and FINRA have each recognized that recommendations to roll over Plan assets to an IRA will almost always involve a securities transaction.

See

Regulation Best Interest Release, 84 FR 33339; FINRA Regulatory Notice 13-45 Rollovers to Individual Retirement Accounts (December 2013),

available at www.finra.org/sites/default/files/NoticeDocument/p418695.pdf.

Some commenters supported the Department's announcement that it would not apply the reasoning of the Deseret Letter but would rather approach the analysis of rollovers based on all the facts and circumstances under the five-part test. These commenters generally supported the possibility that rollover recommendations could be considered fiduciary investment advice if the five-part test is satisfied, particularly given the consequence of the decision to roll over large sums typically accumulated in a Retirement Investor's workplace Plan.

Some commenters stated the Department's proposed interpretation did not go far enough in protecting Retirement Investors, and that all rollover recommendations should be deemed fiduciary investment advice regardless of whether the five-part test is satisfied. Commenters noted that financial professionals have adopted titles such as financial consultant, financial planner, and wealth manager. These commenters stated that reinsertion of the five-part test makes it all too easy for financial services providers to hold themselves out as acting in positions of trust and confidence, even as they effectively avoided fiduciary status by relying on the “regular basis,” “mutual agreement, arrangement, or understanding” and “primary basis” prongs of the test.

One commenter argued that a rollover recommendation should be viewed as always satisfying the “regular basis” prong because, in its view, there are two distinct steps—the decision to do a rollover, and the decision to invest its proceeds.

Comments on the reinsertion of the five-part test are discussed in greater detail below in the section “Reinsertion of the Five-Part Test.”

Other commenters asserted that the facts-and-circumstances analysis would lead to uncertainty as to fiduciary status and that a consequence of that uncertainty is a potential reduction in access to advice. One commenter argued that would lead to more leakage, missing participants, and abandoned accounts. Commenters disagreed with the conclusion that rollover recommendations typically include investment recommendations. Many commenters expressed concern that the Department intended to apply the facts and circumstances analysis to transactions occurring in the past. They said the Department's statement that it would no longer apply the reasoning in the Deseret Letter would expose financial services providers to liability for transactions entered into in the past. Some commenters asked for additional guidance on other types of interactions, including recommendations to increase contributions to a Plan.

After careful consideration of these comments, the Department has determined that, consistent with the position taken in the proposal, the facts and circumstances analysis required by the five-part test applies to rollover recommendations. A recommendation

to roll assets out of a Title I Plan

advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the five-part test, constitutes fiduciary investment advice. This outcome is more aligned with both the facts and circumstances approach taken by Congress in drafting the Act's statutory functional fiduciary test, and with an approach centered on whether the parties have entered into a relationship of trust and confidence.

This outcome is also consistent with the Act's goal of protecting the interests of Retirement Investors given the central importance to investors' retirement security consequences of a decision to roll over Title I Plan assets.

For example, ERISA section 3(21) discusses a fiduciary relationship surrounding the “disposition of [plan] assets.”

The Department agrees that not all rollover recommendations can be considered fiduciary investment advice under the five-part test set forth in the Department's regulation. Parties can and do, for example, enter into one-time sales transactions in which there is no ongoing investment advice relationship, or expectation of such a relationship. If, for example, a participant purchases an annuity based upon a recommendation from an insurance agent without receiving subsequent, ongoing advice, the advice does not meet the “regular basis” prong as specifically required by the regulation.

Nor is the Department persuaded by the commenter who suggested that a rollover transaction should always satisfy the regular basis prong on the grounds that it can be viewed as involving two separate steps—the rollover and a subsequent investment decision. These two steps do not, in and of themselves, establish a regular basis.

Where a broker-dealer or investment adviser makes a recommendation or provides advice that does not meet the five-part test, the recommendation or advice could still be subject to Regulation Best Interest or the investment adviser's fiduciary duty under securities laws, as applicable.

The Department does not believe that its interpretation will lead to loss of access to investment advice due to uncertainty of financial services providers as to their fiduciary status. Taken together, the five-part test as interpreted here and Interpretive Bulletin 96-1, regarding participant investment education, provide Financial Institutions and Investment Professionals a clear roadmap for when they are, and are not, Title I and Code fiduciaries. Since the exemption provides prohibited transaction relief for rollover recommendations that do constitute fiduciary investment advice, Financial Institutions and Investment Professionals would be free to provide fiduciary investment advice and comply with the exemption to avoid a prohibited transaction. In this regard, some commenters specifically supported the proposed exemption as facilitating investment advice and options for consumers. Alternatively, financial services providers can choose not to provide fiduciary investment advice and have no need of this exemption. And, of course, the Department acknowledges some commenters' observations that Retirement Investors may choose on their own to withdraw assets from a Title I Plan and roll over funds to an IRA; however, this exemption focuses on the interests of those Retirement Investors who do receive fiduciary investment advice. The Department further addresses concerns regarding purported uncertainty over whether certain relationships meet the prongs of the five-part test, including the “regular basis” and “mutual agreement” prongs, later in this preamble.

Some commenters stated that the Department should have engaged in notice and comment prior to announcing that it would no longer apply the analysis in the Deseret Letter. Commenters said that the position in the Deseret Letter contributed to a longstanding understanding of the five-part test which should be reversed only through the regulatory process. A commenter noted that, in 2016, the Department characterized the 2016 fiduciary rule as “superseding” the Deseret Letter, and asserted that characterization as evidence that the Department's procedure in this exemption proceeding is inadequate.

The Department does not believe these comments have merit. Advisory opinions, such as the Deseret Letter, are interpretive statements that were not subject to the notice and comment process. As such, the Department need not go through notice and comment to offer a new interpretation of the regulation based on a better reading of governing statutory and regulatory authority, as here.

Moreover, in this instance, the statements made in the preamble to the now-vacated 2016 fiduciary rule are also unpersuasive as to the effect of the Deseret Letter for the same reasons. Rather than take the 2016 fiduciary rule's approach of removing the five-part test through an amendment to the Code of Federal Regulations and, thus, “superseding” the Deseret Letter, the Department now is only changing its view on the Deseret Letter (and specifically, one aspect of it). The five-part test still applies without the Deseret Letter, as it did for decades before the letter. The 2016 fiduciary rule is not in effect, and statements made in the preamble to the vacated rule bear no weight. And, in this instance, the Department solicited and has had the benefit of public comment on its interpretation through the notice and comment process for the exemption. Comments regarding the Department's compliance with Executive Order 13891 are addressed later in this preamble.

See Perez

Mortgage Bankers Assoc.,

575 U.S. 92, 100-01 (2015).

Nevertheless, in response to commenters expressing concern about the possibility of being held liable for past transactions that would not have been treated as fiduciary under the Deseret analysis, the Department will not pursue claims for breach of fiduciary duty or prohibited transactions against any party, or treat any party as violating the applicable prohibited transaction rules, for the period between 2005, when the Deseret Letter was issued, and February 16, 2021, based on a rollover recommendation that would have been considered non-fiduciary conduct under the reasoning in the Deseret Letter. The Department recognizes that advisory opinions issued under ERISA Procedure 76-1, while directly applicable only to their requester,

see

ERISA Procedure 76-1 section 10, can also constitute “a body of experience and informed judgment to which the courts and litigants may properly resort for guidance.”

Raymond B. Yates, M.D., P.C. Profit Sharing Plan

Hendon,

541 U.S. 1, 18 (2004) (quoting

Skidmore

Swift & Co.,

323 U.S. 134, 140 (1944)). For this reason, and because the Department does not wish to disturb the reliance interests of those who looked to the Deseret Letter for guidance, the Department also does not expect or intend a private right of action to be viable for a transaction conducted in reliance on the Deseret Letter prior to that date. Further, the extension of the temporary enforcement policy in FAB 2018-02 until its expiration on December 20, 2021 will allow parties a transition period during which the Department will not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with the Impartial Conduct Standards for rollover recommendations or treat such fiduciaries as violating the applicable prohibited transaction rules.

Additionally, although the Department declines to set broad guidelines in this preamble for what is necessarily a facts-and-circumstances determination about particular business practices, to the extent public comments were based on concerns about compliance and interpretive issues with the final exemption or the Act, the Department intends to support Financial Institutions, Investment Professionals, plan sponsors and fiduciaries, and other affected parties with compliance assistance following publication of the final exemption.

On March 28, 2017, the Treasury Department and the IRS issued IRS Announcement 2017-4 stating that the IRS will not apply § 4975 (which

provides excise taxes relating to prohibited transactions) and related reporting obligations with respect to any transaction or agreement to which the Labor Department's temporary enforcement policy described in FAB 2017-01, or other subsequent related enforcement guidance, would apply. The Treasury Department and the IRS have confirmed that, for purposes of applying IRS Announcement 2017-4, this preamble discussion and FAB 2018-02 constitute “other subsequent related enforcement guidance.”

Facts and Circumstances Analysis

All the elements of the five-part test must be satisfied for the investment advice provider to be a fiduciary within the meaning of the regulatory definition, including the “regular basis” prong as well as requirements that the advice be provided pursuant to a “mutual” agreement, arrangement, or understanding that the advice will serve as “a primary basis” for investment decisions. In addition to satisfying the five-part test, a person must also receive a fee or other compensation to be an investment advice fiduciary under the provisions of Title I and the Code.

If, under this facts and circumstances analysis, advice to roll Title I Plan assets over to an IRA is fiduciary investment advice under Title I, the fiduciary duties of prudence and loyalty under ERISA section 404 would apply to the initial instance of advice to take the distribution and to roll over the assets. Fiduciary investment advice concerning investment of the rollover assets and ongoing management of the assets, once distributed from the Title I Plan into the IRA, would be subject to obligations in the Code. For example, a broker-dealer who satisfies the five-part test with respect to a Retirement Investor in advising on assets in a Title I Plan, advises the Retirement Investor to move his or her assets from the plan to an IRA, and receives any fees or compensation incident to distributing those assets, will be a fiduciary subject to Title I, including section 404, with respect to the advice regarding the rollover. Following the rollover, the broker-dealer will be a fiduciary under the Code subject to the prohibited transaction provisions in Code section 4975.

Final Interpretation

The Department acknowledges that a single instance of advice to take a distribution from a Title I Plan and roll over the assets would fail to meet the regular basis prong. Likewise, sporadic interactions between a financial services professional and a Retirement Investor do not meet the regular basis prong. For example, if a Retirement Investor who is assisted with a rollover expresses the intent to direct his or her own investments in a brokerage account, without any expectation of entering into an ongoing advisory relationship and without receiving repeated investment recommendations from the investment professional, the Department would not view the regular basis prong as being satisfied merely because the investor subsequently sought the professional's advice in connection with another transaction long after receiving the rollover assistance.

However, advice to roll over plan assets can also occur as part of an ongoing relationship or an intended ongoing relationship that an individual enjoys with his or her investment advice provider. In circumstances in which the investment advice provider has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles subject to Title I or the Code, the advice to roll assets out of a Title I Plan is part of an ongoing advice relationship that satisfies the regular basis prong. Similarly, advice to roll assets out of a Title I Plan into an IRA where the investment advice provider has not previously provided advice but will be regularly giving advice regarding the IRA in the course of a more lengthy financial relationship would be the start of an advice relationship that satisfies the regular basis prong. It is clear under Title I and the Code that advice to a Title I Plan includes advice to participants and beneficiaries in participant-directed individual account pension plans, so in these scenarios, there is advice to the Title I Plan—meaning the Plan participant or beneficiary—on a regular basis.

See

ERISA section 408(b)(14) (providing a statutory exemption for transactions in connection with the provision of investment advice described in ERISA section 3(21)(A)(ii) to a participant or beneficiary of an individual account plan that permits such participant or beneficiary to direct the investment of assets in their individual account); Code section 4975(d)(17) (same);

see also

Interpretive Bulletin 96-1, 29 CFR 2509.96-1.

This interpretation is consistent with the approach of other regulators and protects Plan participants and beneficiaries under today's market practices, including the increasing prevalence of 401(k) Plans and self-directed accounts. Numerous sources acknowledge that an outcome of advice given to a Retirement Investor to roll over Title I Plan assets is the compensation an advice provider receives from the investments made in an IRA. For example, in a 2013 notice reminding firms of their responsibilities regarding IRA rollovers, FINRA stated that “a financial adviser has an economic incentive to encourage an investor to roll plan assets into an IRA that he will represent as either a broker-dealer or an investment adviser representative.”

Similarly, in 2011, the U.S. Government Accountability Office (GAO) discussed the practice of cross-selling, in which 401(k) service providers sell Plan participants products and services outside of their Title I Plans, including IRA rollovers. GAO reported that industry professionals said “cross-selling IRA rollovers to participants, in particular, is an important source of income for service providers.”

These types of transactions can initiate a future, ongoing relationship.

FINRA Regulatory Notice 13-45.

U.S. General Accountability Office, 401(k) Plans: Improved Regulation Could Better Protect Participants from Conflicts of Interest, GAO 11-119 (Washington, DC 2011),

available at www.gao.gov/assets/320/315363.pdf.

It is by no means uncommon to interpret regulatory or statutory terms phrased in the present to incorporate the future tense.

See, e.g.,

1 U.S.C. 1.

In applying the regular basis prong of the five-part test, however, the Department intends to preserve the ability of financial services professionals to engage in one-time sales transactions without becoming fiduciaries under the Act, including by assisting with a rollover.

For example, such parties can make clear in their communications that they do not intend to enter into an ongoing relationship to provide investment advice and act in conformity with that communication. In the event that assistance with a rollover does in fact mark the beginning of an ongoing relationship, however, the functional fiduciary test under Title I and the Code appropriately covers the entire fiduciary relationship, including the first instance of advice.

Merely executing a sales transaction at the customer's request also does not confer fiduciary status.

With respect to determining whether there is “a mutual agreement, arrangement, or understanding” that the investment advice will serve as “a primary basis for investment decisions,”

the Department intends to consider the

reasonable

understanding of each of the parties, if no mutual agreement or arrangement is demonstrated. Written statements disclaiming a mutual understanding or forbidding reliance on the advice as a primary basis for investment decisions will not be determinative, although such statements will be appropriately considered in determining whether a mutual understanding exists. Similarly, after consideration of the comments, the Department also intends to consider marketing materials in which Financial Institutions and Investment Professionals hold themselves out as trusted advisers, in evaluating the parties' reasonable understandings with respect to the relationship.

The Department believes that Financial Institutions and Investment Professionals who meet the five-part test and are investment advice fiduciaries relying on this exemption should clearly disclose their fiduciary status to their Retirement Investor customers. By making this disclosure, they provide important clarity to the Retirement Investor and put themselves in the best possible position to meet their fiduciary obligations and comply with the exemption. By setting clear expectations and acting accordingly, the mutual understanding prong of the five-part test should seldom be an issue for parties relying on the exemption. Similarly, if a Financial Institution or Investment Professional does not want to assume a fiduciary relationship or create misimpressions about the nature of its undertaking, it can clearly disclose that fact to its customers up-front, clearly disclaim any fiduciary relationship, and avoid holding itself out to its Retirement Investor customer as acting in a position of trust and confidence.

The Department does not intend to apply the five-part test to determine whether the advice serves as “the” primary basis of investment decisions, as advocated by some commenters, but whether it serves as “a” primary basis, as the regulatory text provides.

Comments on the Regular Basis Analysis

Some commenters on the Department's proposed interpretation of the regular basis prong asserted that the regular basis prong would always be satisfied under the interpretation, and, therefore, the prong was effectively being eliminated from the five-part test. In this regard, one commenter stated that every financial professional wants to develop an ongoing relationship with her customers. Commenters opposed the statement that a rollover recommendation could be the first step in an ongoing advice relationship that would satisfy the regular basis prong. Some commenters characterized this statement as allowing for the “retroactive” imposition of fiduciary status on financial services providers in the event an ongoing relationship develops. Some commenters additionally opined that to be “regular,” the interactions would have to be more than discrete or episodic. Some commenters stated that the advice to a Retirement Investor in a Title I Plan should be viewed as distinct from the advice to the same Retirement Investor whose assets have been transferred to an IRA, for purposes of the analysis of the regular basis prong. Commenters also cautioned that the preamble statement about rollover advice following a pre-existing advice relationship appeared to be overbroad with respect to the types of pre-existing advice relationships to which it would apply.

Commenters in the insurance industry asked the Department to confirm that insurance transactions generally would not be considered fiduciary investment advice, because commenters said they occur infrequently and that ongoing interactions may occur but they are related to servicing the insurance or annuity contract. Some commenters objected to the Department's statement in the preamble that agents who receive trailing commissions on annuity transactions may continue to provide ongoing recommendations or service with respect to the annuity. Commenters asserted that this method of compensation is paid for a variety of reasons and does not indicate an ongoing advice relationship.

A few commenters in the insurance industry and the brokerage industry cited statements in the Fifth Circuit's

Chamber

opinion for the proposition that brokers-dealers and insurance agents would ordinarily not develop a relationship of trust and confidence with prospective customers so as to properly be considered fiduciaries under Title I and the Code. These comments related to the Fifth Circuit's

Chamber

opinion are discussed later in this preamble.

The Department has carefully considered these comments in clarifying its interpretation of the “regular basis” prong of the five-part test. The Department does not believe that the regular basis prong has effectively been eliminated by stating that this prong may be satisfied, in some cases, with the occurrence of first-time advice on rollovers that is intended to be the beginning of a long-term relationship. The regulation still requires, in all cases, that advice will be provided on a regular basis. The Department's interpretation merely recognizes that the rollover recommendation can be the beginning of an ongoing advice relationship. It is important that fiduciary status extend to the entire advisory relationship.

In this regard, when the parties reasonably expect an ongoing advice relationship at the time of the rollover recommendation, the regular basis prong is satisfied. This expectation can be shown by various kinds of objective evidence, of which some examples are discussed below, such as the parties agreeing to check-in periodically on the performance of the customer's post-rollover financial products. In such cases, the parties' expectation at the time of the rollover recommendation appropriately demonstrates that the regular basis prong has been satisfied, and, if the other prongs of the test are satisfied, the financial service providers making the recommendation are appropriately treated as investment advice fiduciaries under Title I and the Code. Likewise, to the extent that financial service providers hold themselves out to the customer as providing such ongoing services, and meet the other elements of the five-part test, they are fiduciaries.

In the Department's view, the updated conduct standards adopted by the SEC and the NAIC reflect an acknowledgment of the fact that broker-dealers and insurance agents commonly provide investment and annuity recommendations to their customers.

To the extent these professionals engage in an ongoing advice relationship, they will likely satisfy the regular basis prong. Moreover, the Department does not intend to interpret “regular basis” to be limited to relationships in which advice is provided at fixed intervals, as suggested by a commenter, but, instead, believes the term “regular basis” broadly describes a relationship where advice is recurring, non-sporadic, and expected to continue. When insurance agents or broker-dealers frequently or periodically make recommendations to their clients on annuity or investment products or features, or on the

investment of additional assets in existing products, they may meet the “regular basis” prong of the five-part test, and are appropriately treated as fiduciaries, assuming that they meet the remaining elements of the fiduciary definition.

See Regulation Best Interest,

17 CFR 240.15l-1(a) (“A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.”) and NAIC Model Regulation Section 6.A. (“A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer's or the insurer's financial interest ahead of the consumer's interest.”).

The Department's interpretation of the regular basis prong does not result in retroactive imposition of fiduciary status, as suggested by some commenters. As noted above, fiduciary status is determined by the facts as they exist at the time of the recommendation, including whether the parties, at that time, mutually intend an ongoing advisory relationship. Every relationship has a beginning, and the five-part test does not provide that the first instance of advice in an ongoing relationship is automatically free from fiduciary obligations. The fact that the relationship of trust and confidence starts with a recommendation to roll the investor's retirement savings out of a Title I Plan is not an argument for treating the recommendation as non-fiduciary. Rather, fiduciary status extends to the entire advisory relationship, including the first—and often most important—advice on rolling the investor's retirement savings out of the Title I Plan in the first place. A financial services provider that recommends that Retirement Investors roll potential life savings out of a Title I Plan with the expectation of offering ongoing advice to the same Retirement Investor whose retirement assets will now be held in an IRA should reasonably understand that the provider will be held to fiduciary standards.

This does not mean that fiduciary status applies to a prior isolated interaction, if the facts and circumstances surrounding the interaction do not reflect that the interaction marked the beginning of an ongoing fiduciary advice relationship. The Department recognizes that relationships, and the parties' understandings of their relationships, can change over time. The Department emphasizes that parties who do not wish to enter into an ongoing relationship can make that fact consistently clear in their communications and act accordingly.

The Department disagrees with commenters who suggested that the “regular basis” requirement must first be met with respect to the Title I Plan, and then again with respect to the IRA. Under the logic of this position, even if the investment advice provider specifically recommended the rollover to the IRA as part of a planned ongoing investment advice relationship, the “regular basis” requirement would not be satisfied with respect to the rollover advice because there was only one instance of advice under the Title I Plan, notwithstanding the expectation of a continued advisory relationship with the same customer with respect to the same assets that were rolled out of the plan. Similarly, the argument asserts that even if the investment advice provider regularly advised the Plan participant on how to invest plan assets, recommended the rollover to an IRA, and then continued to give advice on the IRA account, the first instance of advice post-rollover did not count because the “regular basis” requirement had only been satisfied with respect to the Title I Plan, but not the IRA.

In response, the Department notes that under Title I and the Code, advice to a Title I Plan includes advice to participants and beneficiaries in participant-directed individual account pension plans.

Given that the identical five-part test definition appears in the regulatory definition under both Title I and the Code, the advice is rendered to the exact same Retirement Investor (first as a Plan participant and then as IRA owner), and the IRA assets are derived, in the first place, from that Retirement Investor's Title I Plan account, it is appropriate to conclude that an ongoing advisory relationship spanning both the Title I Plan and the IRA satisfies the regular basis prong. It is enough, in the scenarios outlined above, that the same financial services provider is giving advice to the same person with respect to the same assets (or proceeds of those assets), pursuant to identical five-part tests. A different outcome could all too easily defeat legitimate investor expectations of trust and confidence by arbitrarily dividing an ongoing relationship of ongoing advice and uniquely carving out rollover advice from fiduciary protection.

See supra,

n. 41.

Further, the Department believes an approach that coordinates the five-part test under Title I with the identical test under the Code is consistent with the transfer of authority to the Department under Reorganization Plan No. 4 of 1978.

Pursuant to the Reorganization Plan, the Secretary of Labor has authority to issue regulations, rulings, opinions, and exemptions under Code section 4975, with some limited exceptions not relevant here. The message of the President that accompanied the Reorganization Plan indicated an intent to streamline administration of the Act, and to entrust the Department of Labor with responsibility to oversee fiduciary conduct.

5 U.S.C. App. (2018).

Presidential Statement of October 14, 1978 on Congressional Action on Reorganization Plan No. 4, 1978, Weekly Compilation of Presidential Documents, Vol. 14, No. 42 (Aug. 10, 1978) (accompanying the Reorganization Plan No. 4 of 1978, 5 U.S.C.A. App. 1, 43 FR 47713-16 (Oct. 17, 1978)).

For similar reasons, the Department's interpretation of the regular basis prong does not artificially distinguish between advice to a Retirement Investor in a Title I Plan and advice to the same Retirement Investor in an IRA, when evaluating a rollover recommendation made in the context of a pre-existing advice relationship. Likewise, the Department does not arbitrarily subdivide advice rendered to a plan sponsor on multiple Title I Plans. It is enough, in that case, that the parties have an ongoing advisory relationship with respect to Title I Plans. If, on the other hand, the investment professional only made recommendations to the investor on non-“plan” assets held outside a Plan or an IRA, he or she would not meet the “regular basis” test based solely on additional one-time advice with respect to the Plan or IRA. To meet the regular basis prong in that circumstance, there must be ongoing advice to a “plan” (including Plans and IRAs).

As indicated by the discussion above, whether insurance transactions will fall within or outside the scope of the fiduciary definition in Title I and the Code depends on the related facts and circumstances. Like other transactions involving Retirement Investors, insurance and annuity transactions must be evaluated based on application of the five-part test to the particular scenario. Some commenters raised concerns that trailing annuity commissions could be seen as indicating ongoing service that the Department would view as fiduciary investment advice. Other commenters asserted that the Department's view on this point fails to recognize that insurance agents may receive trailing commissions for reasons wholly unrelated to their relationship with a Retirement Investor, and that how an agent is compensated does not impact whether the regular basis prong of the five-part test is satisfied. The Department clarifies that payment of a trailing commission will not, in and of itself, result in the Department taking the position that the regular basis prong of the five-part test is satisfied with respect to a transaction. On the other hand, if the trailing commission is intended to compensate a financial professional for providing advice to the

Retirement Investor on an ongoing basis, the conclusion could be different, depending on the full facts and circumstances of the advice arrangement.

Mutual Agreement, Arrangement, or Understanding That the Investment Advice Will Serve as a Primary Basis for Investment Decisions

Similar to the comments discussed above, some commenters also asserted that the Department's interpretation of the “mutual agreement, arrangement, or understanding” and the “primary basis” requirements is so broad as to render them meaningless. Some of these commenters objected to the statement that recommendations by financial professionals, particularly pursuant to a best interest standard or another requirement to provide advice based on the individualized needs of the Retirement Investor, will typically involve a reasonable understanding by both parties that the advice will serve as at least a primary basis for the decision. The commenters asserted that the statement is inconsistent with the fact that the broker-dealer and insurance regulatory regimes do not incorporate a fiduciary standard. A few commenters sought confirmation that compliance with Regulation Best Interest would not automatically result in satisfaction of the primary basis prong of the five-part test. Some commenters stated that investors may consult multiple financial professionals and, therefore, the response by any one professional should not be considered a primary basis for the investment decision.

Some commenters opposed the Department's interpretive statement that written disclaimers of fiduciary status or elements of the five-part test will not be determinative. They stated that this interpretation ignores the requirement of “mutuality.” Some commenters also criticized the statement that the five-part test focuses on “a” primary basis, not “the” primary basis, although some acknowledged that “a” is, in fact, the word used in the regulation. Commenters said the interpretation is at odds with the common understanding of the word “primary” and will result in an unwarranted expansion of the five-part test. Commenters also asserted that the statement in the Department's interpretation conflated the primary basis requirement with a separate requirement for individualized advice. On the other hand, another commenter advocated that a Retirement Investor's position as to whether there is an understanding for the advice to provide a primary basis for the investment decision should be provided a presumption of correctness, which can only be overcome with significant evidence.

The Department is not persuaded by these comments to revise its interpretation. As stated above, the Department's interpretation has not rendered these requirements of the five-part test meaningless. Rather, the Department is appropriately applying the five-part test to current marketplace conduct and realities. The fact that a financial services professional is not considered a fiduciary under other laws, such as securities law or insurance law, is not a determinative factor under the five-part test. The focus is on the facts and circumstances surrounding the recommendation and the relationship, including whether those facts and circumstances give rise to a mutual agreement, arrangement, or understanding that the advice will serve as a primary basis for an investment decision. While satisfying the other laws may implicate parts of the test, fiduciary status applies only if all five prongs are satisfied.

The Department does not interpret the “primary basis” requirement as requiring proof that the advice was the single most important determinative factor in the Retirement Investor's investment decision. This is consistent with the regulation's reference to the advice as “a” primary basis rather than “the” primary basis. Similarly, the fact that a Retirement Investor may consult multiple financial professionals about a particular investment does not indicate that the Department's analysis is incorrect. If, in each instance, the parties reasonably understand that the advice is important to the Retirement Investor and could determine the outcome of the investor's decision, that is enough to satisfy the “primary basis” requirement. Even so, all elements of the five-part test must be satisfied for a particular recommendation to be considered fiduciary investment advice, and if a Retirement Investor does not act on a recommendation made by a financial professional, the financial professional would not have any liability for that recommendation.

The Department also recognizes that the requirement for “individualized” advice is separate from the “primary basis” requirement, but this does not mean that the individualized nature of a particular advice recommendation is irrelevant to whether the parties understood that the advice could serve as a “primary basis” for investment decisions.

The Department also is not persuaded by commenters to change its position on the role of written disclaimers of fiduciary status or of elements of the five-part test. In the context of the rendering of investment advice by a financial services professional, written statements disclaiming a mutual understanding or forbidding reliance on the advice as a primary basis for investment decisions will not be determinative, although such statements can be appropriately considered in determining whether a mutual understanding exists. This interpretation will not deprive parties of the ability to define the nature of their relationship, but recognizes that there needs to be consistency in that respect. A financial services provider should not, for example, expect to avoid fiduciary status through a boilerplate disclaimer buried in the fine print, while in all other communications holding itself out as rendering best interest advice that can be relied upon by the customer in making investment decisions. While financial services professionals may contractually disclaim engaging in activities that trigger elements of the five-part test, such as rendering advice that can be relied upon as a primary basis for the Retirement Investor's investment decisions, they must do so clearly and act accordingly to demonstrate that there is in fact no mutual agreement, arrangement, or understanding to the contrary.

One commenter similarly requested that the Department confirm that broker-dealers can disclaim a mutual agreement, arrangement or understanding in cases in which they provide investment recommendations that comply with Regulation Best Interest. The Department declines to do so expressly. As discussed above, the Department has not provided a safe harbor in this exemption for compliance with other regulators' conduct standards. The Department also declines in this exemption to set forth evidentiary burdens applied to establish a mutual understanding, including any presumptions as one commenter suggested. That question is better left to development by the courts or, if necessary, future guidance or rulemaking. The Department reiterates, however, that all prongs of the five-part test, including the regular basis prong, must be satisfied for a person or entity to be a fiduciary. Further, as noted above, a broker-dealer who does not wish to establish a fiduciary relationship in connection with a rollover may make clear in its communications that it does not intend to enter into an ongoing relationship to

provide investment advice and act in conformity with that communication.

“Hire Me” Communications

Some commenters asked the Department to confirm that so-called “hire me” communications, in which financial services professionals engage in introductory conversations to promote their advisory services to Retirement Investors, will not be treated as fiduciary communications under Title I and the Code. Commenters indicated that these types of communications are an important part of the process for a Retirement Investor to select an investment advice provider. A commenter pointed to statements in the Department's 2016 fiduciary rulemaking about the ability of a person or firm to “tout the quality of his, her, or its own advisory or investment management services” without being considered an investment advice fiduciary.

The commenter also pointed to an FAQ issued by the SEC staff in the context of Regulation Best Interest, which confirmed that, absent other factors, the SEC staff would not view this type of communication as a recommendation:

Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20946, 20968 (April 8, 2016).

I have been working with our mutual friend, Bob, for fifteen years, helping him to invest for his kids' college tuition and for retirement. I would love to talk with you about the types of services my firm offers, and how I could help you meet your goals. Here is my business card. Please give me a call on Monday so that we can discuss.

See

Frequently Asked Questions on Regulation Best Interest,

available at www.sec.gov/tm/faq-regulation-best-interest.

In the context of the present exemption proceeding, the Department does not believe that there should be significant concerns about introductory “hire me” conversations. This is because all prongs of the five-part test must be satisfied for a financial services provider to be considered a fiduciary. Nevertheless, the Department confirms that the interpretive statements in this preamble are not intended to suggest that marketing activity of the type described above would be treated as investment advice covered under the five-part test. To the extent, however, that the marketing of advisory services is accompanied by an investment recommendation, such as a recommendation to invest in a particular fund or security, the investment recommendation would be covered if all five parts of the test were satisfied.

For a Fee or Other Compensation, Direct or Indirect

The Department's preamble interpretation in the proposal noted that in addition to satisfying the five-part test, a person must receive a “fee or other compensation, direct or indirect” to be an investment advice fiduciary.

The Department has long interpreted this requirement broadly to cover “all fees or other compensation incident to the transaction in which the investment advice to the plan has been rendered or will be rendered.”

The Department previously noted that “this may include, for example, brokerage commissions, mutual fund sales commissions, and insurance sales commissions.”

In the rollover context, fees and compensation received from transactions involving rollover assets would be incident to the advice to take a distribution from the Plan and to roll over the assets to an IRA.

ERISA section 3(21)(A)(ii); Code section 4975(e)(3)(B).

Preamble to the Department's 1975 Regulation, 40 FR 50842 (October 31, 1975).

Id.

While commenters acknowledged this discussion is consistent with the Department's longstanding interpretive position, they asserted that it is inconsistent with views expressed by the Fifth Circuit in the

Chamber

opinion and with the definition of a fiduciary in Title I and the Code. Responses to arguments about the fee requirement and the

Chamber

opinion follow in the next section.

Procedural and Legal Arguments

Many commenters asserted that the Department failed to comply with the Administrative Procedure Act because the interpretation of the five-part test set forth in the proposal, in their view, effectively amended the five-part test without appropriate procedures. As discussed above, the commenters expressed the view that the Department's preamble interpretation effectively eliminated the “regular basis” and “mutual agreement, arrangement or understanding” prongs of the five-part test. A few commenters additionally suggested that providing the interpretation in the preamble of a proposed class exemption did not provide sufficient notice and opportunity for comment.

The Department's interpretation does not amend the five-part test, but only provides interpretive guidance, in the context of the relief provided in the new exemption, as to how that test applies to current practices in providing investment advice. The regulatory five-part test has long been understood to provide a functional fiduciary test, and the Department's interpretation is based on this understanding. The Department's interpretation does not effectively eliminate any of the elements of the five-part test, but rather applies them to current marketplace conduct and harmonizes with the current regulatory environment.

One commenter asserted that the Department's interpretation was in substance a “legislative rule” which required notice and comment rulemaking, citing

Am. Min. Cong.

Mine Safety & Health Admin.,

995 F.2d 1106, 1112 (D.C. Cir. 1993), and

Chao

Rothermel,

327 F.3d 223, 227 (3d Cir. 2003). The Department disagrees that the factors cited in these cases are satisfied. In this regard, there would be an adequate legislative basis for enforcement in the absence of the interpretation; the preamble interpretation will not be published in the CFR; the Department has not invoked its general legislative authority; and for the reasons stated above, the interpretation does not effectively amend the five-part test. The Department further notes that the interpretation was subject to notice and comment as part of the proposal.

Some commenters opined that the Department's proposed interpretation of the five-part test would result in parties being considered fiduciaries under Title I and the Code under circumstances that would be inconsistent with pronouncements and holdings by the Fifth Circuit in the

Chamber

opinion. In particular, commenters invoked statements by the court that fiduciary status is based on the existence of a relationship of trust and confidence. Commenters stated that at the time of the first instance of advice in an ongoing relationship, a financial services professional may not have developed a relationship of trust and confidence with its customer.

In response, the Department notes that the Fifth Circuit's

Chamber

opinion discussed approvingly the Department's 1975 regulation, which established the five-part test. The court did not indicate that, in an ongoing relationship, there should be any initial instances of advice free of fiduciary status until some later period in which a relationship of trust and confidence has been demonstrated repeatedly. To the contrary, the court expressed agreement that investment advisers registered under the Investment Advisers Act may appropriately be considered fiduciaries without indicating that fiduciary status would only apply after a period of time. Of particular importance, in the Department's view, is the court's approving discussion that the SEC has “repeatedly held” that “[t]he very function of furnishing [investment advice for compensation]—learning the personal and intimate details of the financial affairs of clients and making recommendations as to purchases and

sales of securities—cultivates a confidential and intimate relationship.”

885 F.3d 360, 374 (5th Cir. 2018

)

(citing Hughes, Exchange Act Release No. 4048, 1948 WL 29537, at *4, *7 (Feb. 18, 1948), aff'd sub nom.,

Hughes

SEC,

174 F.2d 969 (D.C. Cir. 1949) and Mason, Moran & Co., Exchange Act Release No. 4832, 1953 WL 44092, at *4 (Apr. 23, 1953)).

The proposed exemption preamble included a discussion of some Financial Institutions paying unrelated parties to solicit clients for them in accordance with Rule 206(4)-3 under the Investment Advisers Act.

The Department noted that advice by a paid solicitor to take a distribution from a Title I Plan and to roll over assets to an IRA could be part of ongoing advice to a Retirement Investor, if the Financial Institution that pays the solicitor provides ongoing fiduciary advice to the IRA owner. A commenter asserted that the interpretation appeared to confer fiduciary status on the solicitor in the absence of a relationship of trust or confidence, which would be impermissible under the Fifth Circuit's opinion. The commenter further asked the Department to clarify whether the mere fact of an affiliation, such as between a broker-dealer and a registered investment adviser, would result in a recommendation by a broker-dealer being considered fiduciary investment advice if an ongoing relationship later developed with an affiliated registered investment adviser.

85 FR 40840 at n.40.

The Department's statement regarding paid solicitors was intended to ensure that Financial Institutions do not take the position that the actions of a party paid to solicit business for them would be considered distinct from any ongoing relationship that resulted. Although the Fifth Circuit's

Chamber

opinion expressed agreement that investment advisers registered under the Investment Advisers Act may appropriately be considered fiduciaries under Title I and the Code, the opinion did not address the practice of paid solicitors. The Department confirms, however, that its statement about paid solicitors was not intended to suggest that a broker-dealer that makes an isolated recommendation would be considered a fiduciary if, entirely unrelated to the recommendation, an ongoing relationship developed with an affiliated investment adviser.

Commenters likewise pointed to statements made in the proposed exemption preamble regarding the statutory requirement that, for fiduciary status to attach, advice must be provided “for a fee or other compensation, direct or indirect.” The preamble stated, “[i]n the rollover context, fees and compensation received from transactions involving rollover assets would be incident to the advice to take a distribution from the Plan and to roll over the assets to an IRA.”

This is consistent with the Department's longstanding position that the statutory language covers “all fees or other compensation incident to the transaction in which the investment advice to the plan has been rendered or will be rendered.”

Id.

at 40840.

Id.

Commenters stated that the preamble interpretation is inconsistent with the statute because, in their view, the fee would be for completed sales, rather than for advice. Some commenters asserted that their view was supported by the Fifth Circuit's

Chamber

opinion. The Fifth Circuit's

Chamber

opinion, however, did not criticize the Department's longstanding interpretation of this statutory requirement. The Fifth Circuit, in fact, indicated the interpretation is appropriate as applied to a party that has met the elements of the five-part test.

The Department's interpretation of the requirement of a “fee or compensation, direct or indirect” is consistent with the statutory language defining a fiduciary under Title I and the Code. Of course, this does not suggest that the Department intends to take the position that transactional compensation to an investment professional who does not meet the elements of the five-part test is a fee for advice. Rather, the Department recognizes that investment professionals may engage in non-fiduciary sales activity in which, as in many sales activities, recommendations are made to a customer. The Department's interpretation respects the legitimate sales function of such a non-fiduciary investment professional.

885 F.3d at 374 (discussing approvingly the Department's Advisory Opinion 83-60 (Nov. 21 1983) which provided that, “if, under the particular facts and circumstances, the services provided by the broker-dealer include the provision of `investment advice', as defined in regulation 2510.3-21(c), it may be reasonably expected that, even in the absence of a distinct and identifiable fee for such advice, a portion of the commissions paid to the broker-dealer would represent compensation for the provision of such investment advice”).

A few commenters additionally asserted that the Department's preamble interpretation is inconsistent with Executive Orders 13891, Promoting the Rule of Law Through Improved Agency Guidance Documents, and 13892, Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication, which they described as requiring transparency and fairness, and as imposing notice and comment requirements, or new restrictions, on agencies when issuing guidance documents.

Even assuming the preamble interpretation is guidance regulated by the Executive Orders, the proposed preamble statement provided notice of the interpretation and solicited public comments on it.

Accordingly, the Department complied with the Executive Orders.

Executive Order 13891, 84 FR 55235 (Oct. 15, 2019); Executive Order 13892, 84 FR 55238 (Oct. 15, 2019).

See

85 FR 40840 (“The Department requests comment on all aspects of this part of its proposal.”).

A few commenters contended that the Department's preamble interpretation is inconsistent with the characterization of the regulatory package as deregulatory. In the Department's view, the exemption as a whole is deregulatory because it provides a broader and more flexible means under which investment advice fiduciaries to Plans and IRAs may receive compensation and engage in certain principal transactions that would otherwise be prohibited under Title I and the Code. Some commenters stated that the exemption effectively reinstates the 2016 fiduciary rule, and one asserted that the Department did so without addressing the President's related concerns in his Memorandum on Fiduciary Duty Rule.

As discussed above, the proposed exemption did not amend the 1975 regulation as the 2016 fiduciary rule sought to undertake. In addition, unlike the 2016 fiduciary rulemaking, this project did not amend other, previously granted, prohibited transaction exemptions.

See Presidential Memorandum on Fiduciary Duty Rule

(Feb. 3, 2017),

www.whitehouse.gov/presidential-actions/presidential-memorandum-fiduciary-duty-rule/.

Description of the Final Exemption

Scope of Relief—Section I

Financial Institutions

The exemption is available to entities that satisfy the exemption's definition of a “Financial Institution.” The exemption limits the types of entities that qualify as a Financial Institution to SEC- and state-registered investment advisers, broker-dealers, insurance companies, and banks.

The definition is based on the entities identified in the statutory exemption for investment advice under ERISA section 408(b)(14)

and Code section 4975(d)(17), which are subject to well-established regulatory conditions and oversight

and have been deemed able to prudently mitigate certain conflicts of interest in their investment advice through adherence to tailored principles under the statutory exemption. The Department takes a similar approach here, and, therefore, is including the same group of entities. To fit within the definition of

Financial Institution,

the firm must not have been disqualified or barred from making investment recommendations by any insurance, banking, or securities law or regulatory authority (including any self-regulatory organization).

The exemption includes a “bank or similar financial institution supervised by the United States or a state, or a savings association (as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)).” The Department interprets this definition to extend to credit unions.

ERISA section 408(g)(11)(A) and Code section 4975(f)(8)(J)(i).

The Department recognized in the proposed exemption that different types of Financial Institutions have different business models, and the exemption is drafted to apply flexibly to these institutions.

Following is a discussion of the different types of Financial Institutions and comments received in connection with the definition.

Some of the Department's existing prohibited transaction exemptions would also apply to the transactions described in the next few paragraphs.

Broker-Dealers

Broker-dealers provide a range of services to Retirement Investors, ranging from executing one-time transactions to providing personalized investment recommendations, and they may be compensated on a transactional basis such as through commissions.

If broker-dealers that are investment advice fiduciaries with respect to Retirement Investors provide investment advice that affects the amount of their compensation, they must rely on an exemption.

Regulation Best Interest Release, 84 FR 33319.

One commenter argued that broker-dealers should not be able to rely on the exemption because they are not fiduciaries under the securities laws. The fiduciary definition in Title I and the Code does not turn, however, on whether parties are characterized as fiduciaries under the securities laws, but rather on whether the persons rendering advice meet the conditions of the functional test of fiduciary status as set forth in the Department's regulation. Moreover, the best interest standard applicable to broker-dealers under Regulation Best Interest is rooted in fiduciary principles.

The SEC explained “key elements of the standard of conduct that applies to broker-dealers, at the time a recommendation is made, under Regulation Best Interest will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act.” Regulation Best Interest Release, 84 FR 33461.

As discussed by the SEC, under the securities laws, a key difference between broker-dealers and investment advisers is that investment advisers typically have a duty to monitor their customers' investments, whereas broker-dealers may more readily limit the scope of their obligations to the specific transactions recommended.

Under Title I and the Code, investment advice fiduciaries are not necessarily obligated to assume a duty to monitor, absent an agreement, arrangement or understanding with their investor client to the contrary. The Department's exemption places the transaction-based advice model on an even playing field with the investment adviser model, and applies fiduciary standards in both contexts that are generally consistent with the standards imposed by the SEC. In this manner, the exemption avoids undue expense and generally aligns its requirements with SEC requirements. Moreover, Congress included broker-dealers and registered investment advisers in the statutory advice exemption in ERISA section 408(b)(14) and Code section 4975(d)(17), according to the same set of conditions.

The SEC explained that “[t]here are also key differences between Regulation Best Interest and the Advisers Act fiduciary standard that reflect the distinction between the services and relationships typically offered under the two business models. For example, an investment adviser's fiduciary duty generally includes a duty to provide ongoing advice and monitoring, while Regulation Best Interest imposes no such duty and, instead, requires that a broker-dealer act in the retail customer's best interest

at the time

a recommendation is made.” Regulation Best Interest Release, 84 FR 33321 (emphasis in the original).

Registered Investment Advisers

Registered investment advisers generally provide ongoing investment advice and services and are commonly paid either an assets under management fee or a fixed fee.

If a registered investment adviser is an investment advice fiduciary that charges only a level fee that does not vary on the basis of the investment advice provided, the registered investment adviser may not violate the prohibited transaction rules.

However, if the registered investment adviser provides investment advice that causes itself to receive the level fee, such as through advice to roll over Plan assets to an IRA, the fee (including an ongoing management fee paid with respect to the IRA) is prohibited under Title I and the Code.

Additionally, if a registered investment adviser that is an investment advice fiduciary is dually-registered as a broker-dealer, the registered investment adviser may engage in a prohibited transaction if it recommends a transaction that increases the firm's compensation, such as for execution of securities transactions in its brokerage capacity. Of course, as discussed above, rollover recommendations or assistance with a rollover do not constitute fiduciary investment advice if the five-part test, including the regular basis prong, is not satisfied.

84 FR 33319.

As noted above, fiduciaries who use their authority to cause themselves or their affiliates or related entities to receive additional compensation violate the prohibited transaction provisions unless an exemption applies. 29 CFR 2550.408b-2(e)(1).

As discussed above, the Department has long interpreted the requirement of a fee to cover “all fees or other compensation incident to the transaction in which the investment advice to the plan has been rendered or will be rendered.” Preamble to the Department's 1975 Regulation, 40 FR 50842 (October 31, 1975).

Commenters sought clarification of the exemption's coverage of certain transactions particularly relevant to registered investment advisers. The commenters inquired about reliance on the exemption solely for a rollover recommendation, under circumstances in which the advice arrangement after the rollover does not involve prohibited transactions (

e.g.,

the compensation arrangement involves only a level fee that does not vary on the basis of the investment transactions) or is not eligible for relief because it is discretionary. The Department confirms that the exemption is available for fiduciary investment advice regarding rollover transactions, even in situations where the exemption is not available (or needed) either before or after the rollover transaction. The commenter also inquired as to whether a financial services provider that serves as a discretionary investment manager to a Plan pursuant to ERISA section 3(38), a transaction that is not covered by the exemption, can rely on the exemption to provide fiduciary investment advice to the Plan's participants and beneficiaries on distribution options. The Department confirms that the exemption is available in that circumstance as well.

Insurance Companies

Insurance companies commonly compensate insurance agents on a commission basis, which generally creates prohibited transactions when insurance agents are investment advice fiduciaries that provide investment advice to Retirement Investors in connection with the sales. The Department is aware that insurance companies often sell insurance products and fixed (including indexed) annuities through different distribution channels

than broker-dealers and registered investment advisers. While some insurance agents are employees of an insurance company, other insurance agents are independent, and work with multiple insurance companies. The final exemption applies to all of these business models.

In the proposal, the Department suggested insurance companies would have several options for compliance. The proposal stated that insurance companies could comply with the new exemption by overseeing independent insurance agents; they could comply with the new exemption by creating oversight and compliance systems through contracts with insurance intermediaries such as independent marketing organizations (IMOs), field marketing organizations (FMOs) or brokerage general agencies (BGAs); or they could rely on the existing class exemption for insurance transactions, PTE 84-24,

as an alternative. Further, the Department sought comment on whether the exemption should include insurance intermediaries as Financial Institutions for the recommendation of fixed (including indexed) annuity contracts, and if so, how the insurance intermediaries should be defined and whether additional protective conditions might be necessary with respect to the intermediaries. Discussion of comments on these aspects of the proposal follow.

Class Exemption for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters, 49 FR 13208 (Apr. 3, 1984), as corrected, 49 FR 24819 (June 15, 1984), as amended, 71 FR 5887 (Feb. 3, 2006).

Direct Oversight

In the proposal, the Department stated that insurance companies could supervise independent insurance agent Investment Professionals who provide investment advice on their products. To comply with the exemption, the Department stated that an insurance company could adopt and implement supervisory and review mechanisms and avoid improper incentives that preferentially push the products, riders, and annuity features that might incentivize Investment Professionals to provide investment advice to Retirement Investors that does not meet the Impartial Conduct Standards. Insurance companies could implement procedures to review annuity sales to Retirement Investors to ensure that they were made in satisfaction of the Impartial Conduct Standards, much as they may already be required to review annuity sales to ensure compliance with state-law suitability requirements.

The Department stated in the proposal that insurance company Financial Institutions would be responsible only for an Investment Professional's recommendation and sale of products offered to Retirement Investors by the insurance company in conjunction with fiduciary investment advice, and not unrelated and unaffiliated insurers.

Cf.

NAIC Model Regulation Section 6.C.(2)(d) (“The insurer shall establish and maintain procedures for the review of each recommendation prior to issuance of an annuity that are designed to ensure that there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumer's financial situation, insurance needs and financial objectives. Such review procedures may apply a screening system for the purpose of identifying selected transactions for additional review and may be accomplished electronically or through other means including, but not limited to, physical review. Such an electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria”); and (e) (“The insurer shall establish and maintain reasonable procedures to detect recommendations that are not in compliance with subsections A, B, D and E. This may include, but is not limited to, confirmation of the consumer's consumer profile information, systematic customer surveys, producer and consumer interviews, confirmation letters, producer statements or attestations and programs of internal monitoring. Nothing in this subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures, or by confirming the consumer profile information or other required information under this section after issuance or delivery of the annuity”),. The prior version of the model regulation, which was adopted in some form by a number of states, also included similar provisions requiring systems to supervise recommendations.

See

Annuity Suitability (A) Working Group Exposure Draft, Adopted by the Committee Dec. 30, 2019,

available at www.naic.org/documents/committees_mo275.pdf.

(comparing 2020 version with prior version).

Cf. id.,

Section 6.C.(4) (“An insurer is not required to include in its system of supervision: (a) A producer's recommendations to consumers of products other than the annuities offered by the insurer”).

A few commenters took the position in response to the proposal that insurance companies are not set up in such a manner as to be able to act as Financial Institutions with respect to independent insurance agents, which they said would ultimately put insurance companies and insurance products at a competitive disadvantage. Commenters asserted that insurance companies do not have insight into or control over independent agents' business and/or behavior and do not consent to or authorize their activities. While several commenters acknowledged that the proposal was consistent with the NAIC Model Regulation in providing that an insurance company Financial Institution would be responsible only for recommendations with respect to its own products, they argued that the proposed exemption deviated from the NAIC's approach in failing to also state that insurers do not have to include in their supervisory systems “consideration of or comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer.”

NAIC Model Regulation Section 6.C.(4)(B).

In response, the Department notes that the NAIC Model Regulation contemplates that insurance companies will maintain a system of oversight with respect to insurance agents. Section I provides that the purpose of the Model Regulation is to “require producers, as defined in this regulation, to act in the best interest of the consumer when making a recommendation of an annuity and to require insurers to establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.”

Accordingly, the Department believes that a system of oversight by insurance companies over independent insurance agents is achievable.

Id.,

Section 1.A. The Department also notes that the prior version of the Model Regulation, which was adopted in some form by a number of states, contains a similar statement. (“The purpose of this regulation is to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed.”)

In terms of the specific oversight requirements, the Department reiterates the statement in the proposal that the exemption requires insurance company Financial Institutions to be responsible only for an Investment Professional's recommendation and sale of products offered to Retirement Investors by the insurance company in conjunction with fiduciary investment advice, and not an unrelated and unaffiliated insurer. The Department also clarifies, in response to commenters, that the exemption does not require consideration of or comparison to specific options available to an independent insurance agent or compensation relating to those options, other than annuities or other products offered by the insurer. The Department's approach is consistent with the approach of the NAIC Model Regulation in this regard as well. However, the Department does not intend to suggest that insurance company Financial Institutions have no obligation to evaluate the financial inducements they offer to independent agents to ensure that the exemption's standards are

satisfied. As discussed above, Financial Institutions can implement procedures to review annuity sales to Retirement Investors under fiduciary investment advice arrangements to ensure that they were made in satisfaction of the Impartial Conduct Standards, much as they may already be required to review annuity sales to ensure compliance with state-law suitability requirements.

See supra

n. 75.

Insurance Intermediaries

In the proposal, the Department stated that insurance companies could create a system of oversight and compliance by contracting with an insurance intermediary or other entity to implement policies and procedures designed to ensure that all of the agents associated with the intermediary adhere to the conditions of this exemption. Thus, for example, as one possible approach, the preamble stated that an insurance intermediary could eliminate compensation incentives across all the insurance companies that work with the insurance intermediary, assisting each of the insurance companies with their independent obligations under the exemption. This might involve the insurance intermediary's review of documentation prepared by insurance agents to comply with the exemption, as may be required by the insurance company, or the use of third-party industry comparisons available in the marketplace to help independent insurance agents recommend products that are prudent for the Retirement Investors they advise.

This type of arrangement is also contemplated by the NAIC Model Regulation, which provides that an insurer is not restricted from contracting for performance of supervisory review functions.

Also, insurance intermediaries can receive payment for these services; to the extent they are “affiliates” or “related entities” of the Financial Institution or Investment Professional, the exemption extends to their receipt of compensation so long as the conditions of the exemption are satisfied.

NAIC Model Regulation, Section 6.C.(3)(a).

One commenter that is an IMO supported the suggestion in the preamble that insurance intermediaries could serve this function. The commenter stated that it currently works with insurance companies to ensure that their policies and procedures are carried out by independent agents. The commenter took the position that it is positioned to work directly with insurance companies to ensure that the proper oversight and compliance systems are in place to comply with the exemption.

PTE 84-24

To the extent that insurance companies determine that the supervisory requirements of this exemption are not well-suited to their business models, it is important to note that insurance and annuity products can also continue to be recommended and sold under the existing exemption for insurance transactions, PTE 84-24. Unlike in the Department's 2016 fiduciary rulemaking, PTE 84-24 is not being amended in connection with the current proposed exemption.

PTE 84-24 provides prohibited transaction relief for the “receipt, directly or indirectly, by an insurance agent or broker . . . of a sales commission from an insurance company in connection with the purchase, with plan assets, of an insurance or annuity contract.” The agent or broker must generally disclose its sales commission and receive written approval of the transaction from an independent fiduciary.

A commenter expressed concern that the Department's disavowal of the Deseret Letter would result in a requirement to provide the disclosures required by PTE 84-24 to a plan fiduciary, rather than the IRA owner, in the case of a rollover recommendation. The Department confirms that when a transaction under PTE 84-24 involves an IRA, the disclosure can be provided to the IRA owner. Further, to avoid uncertainty, the Department also confirms that an insurance intermediary can receive a part of the commission payment that is permitted under PTE 84-24, provided the conditions of the exemption are satisfied.

Insurance Intermediaries as Financial Institutions

The Department also sought comment in the proposal as to whether the exemption's definition of Financial Institution should be expanded to include insurance intermediaries. Under that approach, the insurance intermediary would implement the conditions of the exemption applicable to Financial Institutions, and insurance companies would not have to do so.

Several commenters supported the addition of insurance intermediaries as Financial Institutions, in connection with their contention that insurance companies are not in a position to exert oversight over independent insurance agents because the independent agents sell products of other insurance companies as well. A few commenters stated that the insurance intermediaries are in a position to do so because of their proximity to and expertise working with independent insurance agents. The commenters stated that insurance intermediaries have greater insight into and control over the actions of independent insurance agents than insurance companies. Further, the commenters emphasized that insurance intermediaries are regulated by the states as insurance agencies, and they have sufficient resources and staff to act as Financial Institutions. These commenters also asserted insurance intermediaries' similarity to the registered investment adviser business model and stated that a failure to include insurance intermediaries as Financial Institutions would result in a competitive disadvantage for insurance intermediaries and potentially less choice for Retirement Investors.

Other commenters, however, indicated that insurance intermediaries are not in a position to oversee independent insurance agents because it is common for independent insurance agents to work with multiple intermediaries, raising issues as to whether multiple intermediaries would have to oversee the same independent agent. One commenter also indicated that independent agents have contracts or arrangements directly with the insurance company; by contrast, there is no contract or implied contract between insurance intermediaries and independent insurance agents, and insurance intermediaries do not direct the independent insurance agents' recommendations to Retirement Investors. A few commenters asserted that unlike the other entities included in the definition of a Financial Institution, insurance intermediaries do not have a regulator that sets standards regarding oversight and supervisory policies and procedures. One commenter asserted that the exemption would need to include conditions addressing the Department's oversight of insurance intermediaries if they were included in the definition of a Financial Institution. Another commenter urged the Department to work closely with insurance intermediaries before including them as Financial Institutions, so as to avoid imposing conditions that are impractical or burdensome.

Based on the record before it, the Department has concluded that it should not expand the scope of the definition of Financial Institution to insurance intermediaries, such as IMOs, FMOs, or BGAs. These entities do not have supervisory obligations over independent insurance agents under state or federal law that are comparable

to those of the other entities, such as insurance companies, banks, and broker-dealers, or a history of exercising such supervision in practice. They are generally described as wholesaling and marketing and support organizations, but not tasked with ensuring compliance with regulatory standards. In addition, they are not subject to the sort of capital and solvency requirements imposed on state-regulated insurance companies and banks.

Commenters also did not provide specific suggestions for how to define the insurance intermediaries that could be Financial Institutions. One commenter suggested that Financial Institution status and its attendant compliance responsibilities should be placed on the intermediary that is closest to the Retirement Investor and the Investment Professional advising that investor. However, this suggestion does not alleviate the operational issues that would exist when an independent agent works with or through more than one intermediary. Commenters also did not offer suggestions as to substantive conditions that should be included to make up for the lack of regulatory oversight. The considerations above may not be insuperable obstacles to treating insurance intermediaries as Financial Institutions under the terms of a future exemption that is based on an appropriate record focused on such support organizations. The Department anticipates that any such exemption would specifically focus on the unique attributes, strengths, and weaknesses of these entities, and on any special conditions that would be necessary to ensure they are able to act in the necessary supervisory capacity as Financial Institutions.

The Department also has maintained the provision in this exemption under which the definition of a Financial Institution can expand based upon subsequently granting individual exemptions to additional entities that are investment advice fiduciaries that meet the five-part test and are seeking to be treated as covered Financial Institutions. Thus, additional types of entities, such as IMOs, FMOs, or BGAs may separately apply for prohibited transaction relief to receive compensation in connection with the provision of investment advice, according to the same conditions that apply to the Financial Institutions covered by this exemption. If the Department grants to such an entity an individual exemption under ERISA section 408(a) and Code section 4975(c)(2) after the date this exemption is granted, the expanded definition of Financial Institution in the individual exemption would be added to this class exemption so other entities that satisfy the definition could similarly use this class exemption.

The Department acknowledges that some commenters felt this approach would put insurance intermediaries at a disadvantage as compared to other Financial Institutions. As discussed above, however, there is cause for concern about including insurance intermediaries in the final exemption on the same footing as the types of entities included in the Financial Institution definition. On the record before it, the Department has concluded that the better course of action is to invite any insurance intermediaries to apply for a separate exemption as part of a public notice and comment process that can specifically focus on their unique attributes, so that the Department can determine whether and how to grant exemptive relief, subject to appropriate definitional and protective conditions.

Banks

Banks and similar institutions are permitted to act as Financial Institutions under the exemption if they or their employees are investment advice fiduciaries with respect to Retirement Investors. The Department sought comment on whether banks and their employees provide investment advice to Retirement Investors, and if so, whether the proposal needed adjustment to address any unique aspects of their business models.

A trade association representing banks submitted a comment that described a wide variety of interactions with banking customers, including IRA investment programs and bank networking arrangements and referral programs. The commenter stated that banks that render investment advice are fully subject to applicable federal and state banking laws governing fiduciary status and activities.

The commenter expressed support for the exemption, so long as certain suggested changes were adopted to conform to banks' distinct business model, particularly with respect to the retrospective review and the recordkeeping provision. The Department's responses to these comments on the exemption are discussed below in the sections on the retrospective review and recordkeeping provision.

Citing 12 CFR part 9 (fiduciary activities of banks).

Affiliates and Related Entities

One commenter stated that the exemption text should include a definition of “affiliate” and “related entity.” The Department has added the definitions that previously appeared in the preamble of the proposed exemption, in Section V(a) and (j), respectively, of the final exemption text.

An affiliate is defined as (1) any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Investment Professional or Financial Institution (for this purpose, “control” means the power to exercise a controlling influence over the management or policies of a person other than an individual); (2) any officer, director, partner, employee, or relative (as defined in ERISA section 3(15)), of the Investment Professional or Financial Institution; and (3) any corporation or partnership of which the Investment Professional or Financial Institution is an officer, director, or partner. A related entity is defined as an entity that is not an affiliate, but in which the Investment Professional or Financial Institution has an interest that may affect the exercise of its best judgment as a fiduciary.

Another commenter stated that the Department should add foreign affiliates of banks, broker-dealers, insurance companies, and registered investment advisers to the entities covered by the exemption, given the increasingly global nature of retirement services. The proposed exemption indicated that relief would be available to affiliates and related entities of a Financial Institution and Investment Professional, if the Financial Institution and Investment Professional satisfied the exemption's conditions. The Department did not exclude foreign affiliates in the proposal, and confirms that they are not excluded in the exemption, as finalized.

Other Entities—Recordkeepers and HSA Providers

One commenter requested that recordkeepers be included as Financial Institutions. To the extent that an entity hired to act as a recordkeeper to a Plan or an IRA falls within the list of defined Financial Institutions, it may rely upon the exemption. However, the Department declines to add a general category for recordkeepers to the definition. The Department does not believe a recordkeeper that is not also a bank, broker-dealer, insurance company, or registered investment adviser would have the requisite regulatory oversight to necessarily act as a Financial Institution. However, such parties can seek an individual exemption from the Department, as

provided in the definition of a Financial Institution in Section V(e).

One commenter addressed health savings accounts (HSAs), indicating that the exemption should apply to advice to individuals with HSAs. The commenter did not indicate whether the definition of Financial Institution needed to be expanded to facilitate advice regarding HSAs. The exemption, as proposed and finalized, defines an IRA as “any account or annuity described in Code section 4975(e)(1)(B) through (F)” which includes a “health savings account described in [Code] section 223(d).” Therefore, advice may be provided to individuals with HSAs, subject to the conditions of the exemption.

Investment Professionals

As defined in the proposal, an

Investment Professional

is an individual who is a fiduciary of a Plan or an IRA by reason of the provision of investment advice, who is an employee, independent contractor, agent, or representative of a Financial Institution, and who satisfies the federal and state regulatory and licensing requirements of insurance, banking, and securities laws (including self-regulatory organizations) with respect to the covered transaction, as applicable. Similar to the definition of

Financial Institution,

this definition also includes a requirement that the Investment Professional has not been disqualified from making investment recommendations by any insurance, banking, or securities law or regulatory authority (including any self-regulatory organization).

One commenter suggested that the exemption should require investment professionals to be certified by an accredited organization or state agency in financial planning issues. The Department has not adopted this suggestion because it does not have sufficient information in the record on this type of certification to incorporate it as a condition.

Another commenter asked the Department to confirm that insurance agents unaffiliated with a broker-dealer or registered investment adviser are investment advice fiduciaries when providing investment advice to Retirement Investors through the sale of insurance products and fixed (including indexed) annuities, and are subject to the requirements under the exemption. The Department confirms that an insurance agent that meets the elements of the five-part test and receives a fee or other compensation, direct or indirect, with respect to a particular transaction, is a fiduciary with respect to that transaction. Under those circumstances, the insurance agent must avoid prohibited transactions or comply with a prohibited transaction exemption.

Retirement Investors and Plans

The exemption provides relief for specified Covered Transactions when Financial Institutions and Investment Professionals provide investment advice to

Retirement Investors.

A Retirement Investor is defined as (1) a participant or beneficiary of a Plan with authority to direct the investment of assets in his or her account or to take a distribution, (2) the beneficial owner of an IRA acting on behalf of the IRA, or (3) a fiduciary of a Plan or an IRA. A

Plan

for purposes of the exemption is defined as any employee benefit plan described in ERISA section 3(3) and any plan described in Code section 4975(e)(1)(A). An

IRA

is defined as any plan that is an account or annuity described in the other parts of section 4975(e)(1): Paragraphs 4975(e)(1)(B) through (F).

A few commenters questioned the meaning of Retirement Investor with respect to the definition's use of the word

Plan.

One commenter requested clarification that the use of the term

Plan

with respect to a Retirement Investor, in fact, included Title I welfare benefit plans despite the use of the word “retirement.” Two other commenters requested that the definition of Plan specifically exclude Title I welfare benefit plans that do not include an investment component, such as health insurance plans, disability insurance plans, and term life insurance plans.

While the exemption uses the term Retirement Investor throughout the exemption, the use of the term was not intended to exclude investment advice provided to Title I welfare benefit plans. In fact, the exemption's definition of Plan states that it is defined, in part, by reference to ERISA section 3(3), which explicitly includes Title I welfare benefit plans.

With respect to the request to exclude Plans that do not contain an investment component, the Department responds that the exemption is only necessary and available to fiduciaries who provide investment advice as described in the five-part test. If there is no fiduciary investment advice, the exemption would not be applicable or needed. In light of this limitation, the Department does not believe any further amendment to the definition of a Plan is necessary.

Covered Transactions

The exemption permits Financial Institutions and Investment Professionals, and their affiliates and related entities, to receive reasonable compensation as a result of providing fiduciary investment advice. The exemption specifically covers compensation received as a result of investment advice to roll over assets from a Plan to an IRA. The exemption also provides relief for a Financial Institution to engage in the purchase or sale of an asset in a riskless principal transaction or a Covered Principal Transaction, and receive a mark-up, mark-down, or other payment. The exemption provides relief from ERISA section 406(a)(1)(A) and (D) and 406(b) and Code section 4975(c)(1)(A), (D), (E), and (F).

The exemption does not include relief from ERISA section 406(a)(1)(C) and Code section 4975(c)(1)(C) for the furnishing of goods, services, or facilities between a Plan/IRA and a party in interest/disqualified person. The statutory exemptions in ERISA section 408(b)(2) and Code section 4975(d)(2) provide this necessary relief for Plan or IRA service providers, subject to the applicable conditions and accompanying regulations.

Section I(b)(1) of the exemption provides broad relief for Financial Institutions and Investment Professionals that are investment advice fiduciaries to receive all types of compensation as a result of their investment advice to Retirement Investors, so long as the compensation is reasonable. For example, it covers compensation received as a result of investment advice to acquire, hold, dispose of, or exchange securities and other investments. It also covers compensation received as a result of investment advice to take a distribution from a Plan or to roll over the assets to an IRA, or from investment advice regarding other similar transactions including (but not limited to) rollovers from one Plan to another Plan, one IRA to another IRA, or from one type of account to another account (

e.g.,

from a commission-based account to a fee-based account), all limited to the extent such rollovers are permitted under applicable law.

Section I(b)(2) addresses the circumstance in which the Financial Institution may, in addition to providing investment advice, engage in a purchase or sale of an investment with a Retirement Investor and receive a mark-up or a mark-down or similar payment on the transaction. The exemption extends to both riskless principal transactions and Covered Principal Transactions. A riskless principal transaction is a transaction in which a Financial Institution, after having received an order from a Retirement Investor to buy or sell an investment product, purchases or sells the same investment product for the Financial Institution's own account to offset the contemporaneous transaction with the Retirement Investor. Covered Principal

Transactions are defined in the exemption as principal transactions involving certain specified types of investments, discussed in more detail below. Principal transactions that are not riskless and that do not fall within the definition of Covered Principal Transaction are not covered by the exemption.

General Comments on the Covered Transactions

Several commenters expressed concern about the scope of the exemption extending to the receipt of payments from third parties, such as 12b-1 fees and revenue sharing. One commenter also objected to relief for sales loads. The commenter opined that the market itself is moving away from these types of fees and expenses and numerous court decisions indicate that a Plan's payment of such fees may be a violation of the duty of prudence. Another commenter likened this type of payment as akin to doctors taking kickbacks from pharmaceutical companies. Another commenter stated that the exemption should not provide relief for principal transactions and proprietary products.

The Department believes that the flexibility provided under the exemption ensures that the various business models used by different Financial Institutions are accommodated under the exemption to ensure Retirement Investors have full access to their preferred advice provider and method of paying for advice. The conditions of the exemption are designed to ensure that Financial Institutions assess all sources of fees and revenue to identify and mitigate conflicts of interest that they create, and ultimately receive no more than reasonable compensation in connection with investment advice transactions. These conditions are designed to ensure that Financial Institutions and Investment Professionals act in the best interest of Retirement Investors, even if some sources of compensation come from 12b-1 fees, revenue sharing, sales loads, principal transactions, or proprietary products. The Department continues to believe that this principles-based approach provides flexibility to Financial Institutions while ensuring all advice is in the best interest of Retirement Investors, compensation is limited to reasonable compensation, and Investment Professionals do not subordinate the Retirement Investors' interest to their own.

Another commenter asked the Department to expand the scope of relief in the exemption to ERISA section 406(a)(1)(B) and Code section 4975(c)(1)(B) for extensions of credit, in order to cover items such as overdraft protection, receipt of float, error corrections, settlement accommodations, short sales and other margin transactions, and paying fees in advance.

The Department has not expanded the exemption as requested by the commenter. The commenter did not provide information on these transactions and how the exemption conditions would protect the interests of Retirement Investors engaging in the transactions. An existing exemption, PTE 75-1, Part V, provides relief for an extension of credit by a broker-dealer in connection with the purchase or sale of securities; however, the exemption does not extend to the receipt of compensation for the extension of credit if the broker-dealer renders fiduciary investment advice with respect to the transaction. This does not foreclose the Department, however, from considering expanding the relief in PTE 75-1, Part V, based upon a separate request for exemptive relief.

Principal Transactions

Principal transactions involve the purchase from, or sale to, a Plan or an IRA, of an investment, on behalf of the Financial Institution's own account or the account of a person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Financial Institution. Because an investment advice fiduciary engaging in a principal transaction is on both sides of the transaction, the firm has a clear and direct conflict of interest. In addition, the securities typically traded in principal transactions often lack pre-trade price transparency and Retirement Investors may, therefore, have difficulty in prospectively evaluating the fairness of a particular principal transaction. These investments also can be associated with low liquidity, low transparency, and the possible incentive to sell unwanted investments held by the Financial Institution.

Consistent with the Department's historical approach to prohibited transaction exemptions for fiduciaries, this exemption includes relief for principal transactions that is limited in scope and subject to additional conditions, as set forth in the definition of Covered Principal Transaction, described below. Importantly, certain transactions are not considered principal transactions for purposes of the exemption, and so can occur under the more general conditions. This includes the sale of an insurance or annuity contract, or a mutual fund transaction.

Principal transactions that are “riskless principal transactions” are covered under the exemption as well, subject to the general conditions. A riskless principal transaction is a transaction in which a Financial Institution, after having received an order from a Retirement Investor to buy or sell an investment product, purchases or sells the same investment product in a contemporaneous transaction for the Financial Institution's own account to offset the transaction with the Retirement Investor.

Limited Definition of “Covered Principal Transaction”

The exemption uses the defined term

Covered Principal Transaction

to describe the types of non-riskless principal transactions that are covered under the exemption. For

purchases

from a Plan or an IRA, the term is broadly defined to include any security or other investment property. This is to reflect the possibility that a principal transaction will be needed to provide liquidity to a Retirement Investor. However, for

sales

to a Plan or an IRA, the exemption provides more limited relief. For sales, the definition of Covered Principal Transaction is limited to transactions involving: U.S. dollar denominated corporate debt securities offered pursuant to a registration statement under the Securities Act of 1933, U.S. Treasury securities, debt securities issued or guaranteed by a U.S. federal government agency other than the U.S. Department of Treasury, debt securities issued or guaranteed by a government-sponsored enterprise (GSE), municipal securities, certificates of deposit, and interests in Unit Investment Trusts. In response to one commenter's specific question as to whether the term “certificates of deposit” includes brokered certificates of deposit, the Department clarifies that the use of the term “certificates of deposit” includes brokered certificates of deposit that are sold in principal transactions.

With respect to the definition of Covered Principal Transaction, some commenters wrote that there should not be a limit on the types of investments that can be sold by Financial Institutions to Retirement Investors, including one commenter who stated that the Department should eliminate or adjust exemption conditions that would limit Retirement Investors' access to full service brokerage accounts, including access to principal markets. They argued that some products would generally only be available through a

principal transaction, and that the Department should not substitute its judgment for a fiduciary acting in accordance with the Act's standards. Further, they stated that the existing limit is inconsistent with Regulation Best Interest which does not include any limitations on principal transactions, and that there were sufficient existing protections under securities laws. Commenters identified a variety of potential investments that they would like to see incorporated as Covered Principal Transactions, including foreign debt, structured notes, corporate debt in the secondary market, equity securities (including initial public offerings and national market system securities), new issues, issuers other than corporations, foreign currency, foreign securities, and closed end funds.

The Department has considered these comments but has not expanded the exemption's definition of a Covered Principal Transaction, including its enumerated list of investments. The definition of Covered Principal Transaction is intentionally narrow, based on the potentially acute conflicts of interest created by principal transactions. While commenters argued that the Department is substituting its own judgment for that of Financial Institutions and Investment Professionals, the Department believes that the risks created by principal transactions' unique conflicts are great enough to only justify allowing otherwise prohibited transactions if those transactions are set within prescribed conditions specifically designed to address those conflicts of interest. Further, because the exemption is addressing transactions prohibited solely under Title I and the Code, whether the definition of a Covered Principal Transaction is consistent with Regulation Best Interest, or subject to other securities law protections, is not determinative. The Department is required to make findings as to whether the exemption is in the interests of, and protective of the rights of, Plan participants and beneficiaries and IRA owners.

The Department stresses its obligation to exercise great care in authorizing transactions that Congress prohibited based upon their potential for abuse and resulting injury to Plan participants and IRA owners. Given the unique starting point—that Congress statutorily prohibited these transactions in Title I and the Code—the Department does not agree that the approach suggested by the commenters is appropriate. To the extent parties have interpretive questions regarding the scope of the exemption in this regard, the Department intends to support Financial Institutions, Investment Professionals, plan sponsors and fiduciaries, and other affected parties, with compliance assistance following publication of the final exemption.

See

ERISA section 408(a) and Code section 4975(c)(2).

The Department believes the best way to address commenters' concerns regarding additional investments is to include the provision allowing the definition of Covered Principal Transaction to expand upon the Department's grant of an individual exemption covering a particular type of principal transaction. An individual exemption request would provide the Department with the opportunity to gain the additional information it would need to determine whether an investment should be included in this exemption. Further, individual exemptions are required to be published in the

Federal Register

and allow for public comment before they are finalized. These procedural requirements are protective of Retirement Investors.

One commenter disagreed with the addition of investments through the individual prohibited transaction exemption process. The commenter argued that the addition of investments should be accomplished through a formal amendment to the exemption. The Department believes that the procedural requirements described in the preceding paragraph provide protections to Retirement Investors, and the ability to incorporate additional investments by adopting an individual exemption provides an appropriately streamlined approach to address discrete areas of scope within the class exemption.

Credit Quality and Liquidity

For sales of a debt security to a Plan or an IRA, the definition of Covered Principal Transaction requires the Financial Institution to adopt written policies and procedures related to credit quality and liquidity. Specifically, the policies and procedures must be reasonably designed to ensure that the debt security, at the time of the recommendation, has no greater than moderate credit risk and has sufficient liquidity that it could be sold at or near its carrying value within a reasonably short period of time. This standard is included to prevent the exemption from being available to Financial Institutions that recommend speculative or illiquid debt securities from their own accounts.

A few commenters opposed the proposed condition requiring adoption of policies and procedures related to credit quality and liquidity. The commenters argued that this condition substitutes the Department's judgment for that of the Retirement Investor. Further, they stated that the standards would be difficult to apply, requiring firms to look into the future to know whether a bond would be actively traded. One commenter stated specifically that a liquidity condition should not be included.

The Department has considered these comments, but has included the credit quality and liquidity policies and procedures condition in the final exemption. Principal transactions are inherently conflicted transactions. As a result, the Department believes that unique conditions, such as the credit and liquidity requirements, address the heightened conflicts of interest and are specifically tailored to address conflicts inherent with respect to debt securities. The Department is not substituting its judgment for that of Retirement Investors; it is only setting necessary safeguards to prevent abuses by Financial Institutions relying on the exemption. Additionally, the Department notes that the exemption is not necessary for self-directed retirement accounts or transactions that do not involve fiduciary investment advice. Therefore, such truly self-directed accounts and transactions may involve the purchase of any type of investment on a principal basis.

Further, the Department does not believe the standards are unworkable. Financial Institutions regularly evaluate the credit risk associated with their investments and assess their liquidity. And it is important to note that the policies and procedures must be reasonably designed to ensure that the standards are met

at the time of the transaction;

the exemption does not require them to be satisfied for the duration of the investment. Indeed, a commenter who raised concerns about the requirement went on to point out ways a Financial Institution could reasonably consider the liquidity at the time of the transaction. This commenter stated that it is the very nature of bond trading that liquidity generally tends to diminish as bonds mature. The Department expects that a Financial Institution would consider this and other reasonably available information at the time of the transaction in designing its policies and procedures. It is also important to note that Financial Institutions may consider credit ratings as a part of a Financial Institution's policies and procedures in this respect.

Municipal Bonds

The exemption covers principal transactions involving municipal bonds, including tax-exempt municipal bonds. The Department cautions, however, that Financial Institutions and Investment Professionals should pay special care when recommending that Retirement Investors invest in municipal bonds. Tax-exempt municipal bonds are typically a poor choice for investors in Title I Plans and IRAs because the Plans and IRAs are already tax-advantaged and, therefore, do not benefit from paying for the bond's tax-favored status.

See e.g.,

Seven Questions to Ask When Investing in Municipal Bonds,

available at www.msrb.org/~/media/pdfs/msrb1/pdfs/seven-questions-when-investing.ashx.

(“[T]ax-exempt bonds may not be an efficient investment for certain tax advantaged accounts, such as an IRA or 401k, as the tax-advantages of such accounts render the tax-exempt features of municipal bonds redundant. Furthermore, since withdrawals from most of those accounts are subject to tax, placing a tax exempt bond in such an account has the effect of converting tax-exempt income into taxable income. Finally, if an investor purchases bonds in the secondary market at a discount, part of the gain received upon sale may be subject to regular income tax rates rather than capital gains rates.”)

One commenter stated that no tax-exempt investment (including tax-exempt municipal bonds and certain annuities) should be included in the exemption, absent evidence that such investments are beneficial when purchased through a retirement account. The Department believes, however, that there are certain limited circumstances where these investments may benefit a Retirement Investor. For example, a particular municipal bond may have a higher tax-equivalent yield than a comparable taxable bond. Alternatively, a fiduciary adviser may conclude based upon careful analysis that a particular tax-exempt municipal bond carries less risk than a comparable corporate bond. Accordingly, the Department has not written the exemption to flatly exclude tax-exempt investments. However, given the increased risk of imprudence when making such recommendations, Financial Institutions and Investment Professionals may wish to document the reasons for any recommendation of a tax-exempt municipal bond or other tax-exempt investment and why the recommendation is in the Retirement Investor's best interest.

Separate Exemption

One commenter asserted that principal transaction relief should be provided through a separate exemption. The commenter argued that the exemption's conditions are not sufficiently protective with respect to the unique nature of principal transactions. Instead, the commenter advocated for a separate prohibited transaction class exemption modeled after the statutory exemption for cross-trading in ERISA section 408(b)(19) and Code section 4975(d)(22). Using the statutory exemption as a model, the commenter suggested that the exemption include conditions such as minimum size requirements and a requirement that the transaction occur at the “independent current market price.”

The Department has considered this suggestion, but has not adopted it. Although the Department agrees that the conflicts of interest in cross-trades are significant, the transactions contemplated by the statutory exemptions for cross-trades are not, in the Department's view, necessarily so analogous to the principal transactions covered by this exemption that the conditions of the statutory exemption are easily applied in this context. The statutory exemption is aimed at discretionary investment managers that are managing large accounts, while this exemption is designed to include investment advice providers who may be providing advice in the retail market. It would be difficult, for example, for the Department to arrive at a minimum size that would be appropriate for engaging in principal transactions with retail investors. The Department also believes that co

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