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.
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.
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
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.
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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Resource Center to stay up to date on all related legal issues.
James N. Karas, Jr.