Department of Labor Announces Criteria for Investment Advice Fiduciary Status - Again
On Monday, June 29, 2020, the Department of Labor announced that it was (i) reinstating a five-part test to determine the status of an investment fiduciary under ERISA, and (ii) proposing a new prohibited transaction class exemption for investment fiduciaries that would allow for otherwise prohibited self-dealing if certain requirements are met. The five-part test is effective immediately as a final rule without public comment (the test was originally instituted in 1975 but replaced in 2016 by regulations and class exemptions that were vacated under court order). The proposed class exemption is available for public comment within 30 days of publication in the Federal Register.
Under ERISA and the Internal Revenue Code, an investment advice fiduciary is a person or institution that renders advice for direct or indirect compensation with respect to plan assets, or has any authority to do so. Under the five-part test, “investment advice” that can lead to fiduciary status is advice to a plan: (1) relating to the value of, or recommendations as to investments in, securities or other property; (2) made on a regular basis; (3) pursuant to a mutual agreement or arrangement; (4) that serves as a primary basis for investment decisions; and (5) is individualized based on the needs and objectives of the plan. Accordingly, a financial institution or investment professional that meets these criteria and receives direct or indirect compensation from a plan for its investment advice is a fiduciary under ERISA responsible for acting in accordance with ERISA fiduciary standards of conduct and avoiding prohibited transactions (including self-dealing and other conflicts of interest) that are not exempted.
Under the proposed class exemption, an investment advice fiduciary may be exempted from an otherwise prohibited transaction provided they: (A) follow “impartial conduct standards” consisting of a “best interest standard” (that is, acting prudently and in the interests of the plan ahead of the advisor’s interests), a “reasonable compensation standard” and a requirement not to make materially misleading statements regarding services; (B) disclose to the plan or retirement investor the advisor’s status as a fiduciary, the advisor’s services and any material conflicts of interest; (C) implement policies and procedures designed to ensure compliance with the impartial conduct standards and to mitigate conflicts of interest; and (D) conduct an annual retrospective compliance review.
Plan fiduciaries should review the current Department of Labor criteria for determining fiduciary status in order to identify investment fiduciaries, and should ensure effective compliance with the Department’s prohibited transaction exemption requirements in the immediate and longer term. Plan investment advisors should notify plan investment or other fiduciaries of their compliance with the Department’s class exemption requirements once finalized.
If you have any questions concerning this Client Alert, please contact the author, James N. Karas, or any other member of our Employee Benefits and Executive Compensation Group.
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