RIA Compliance and Practice Management Blog

An Overview of the DOL's Fiduciary Rule FAQ Guidance

Posted by RIA in a Box

Apr 21, 2021 4:39:13 PM

DOL Fiduciary Rule FAQ for RIA firms

On April 13, 2021, the U.S. Department of Labor (“DOL”) released additional guidance to the “Improving Investment Advice for Workers & Retirees” exemption in the form of a FAQs sheet.

The DOL originally published the PTE 2020-02, “Improving Investment Advice for Workers & Retirees” exemption in December 2020, with an effective date of February 16, 2021. We previously published an overview of the exemption as it relates to both SEC and state registered investment advisor firms, on our blog page, available here.

The FAQ sheet is comprised of four sections: 1) background, 2) compliance dates, 3) definition of fiduciary investment advice, and 4) compliance with PTE 2020-02.

Below we highlight the four sections discussed in Tuesday’s release:

View our Best Practices for Email Surveillance Checklist

Background: The exemption was created to ensure retirement investors (e.g. plan participants, beneficiaries, and IRA owners) receive investment advice that is in their best interest and is seen as “loyal and prudent.” There is an emphasis placed on the conclusion that investment advice to roll assets from a retirement plan to an IRA, is to be considered fiduciary advice.

PTE- 2020-02 provides the following compliance requirements to investment advisers seeking to rely on the exemption:

  • acknowledge their fiduciary status in writing,
  • disclose their services and material conflicts of interest,
  • adhere to Impartial Conduct Standards requiring that they
    • investigate and evaluate investments, provide advice, and exercise sound judgment in the same way that knowledgeable and impartial professionals would (i.e., their recommendations must be “prudent”),
    • act with undivided loyalty to retirement investors when making recommendations (in other words, they must never place their own interests ahead of the interests of the retirement investor, or subordinate the retirement investor’s interests to their own),
    • charge no more than reasonable compensation and comply with federal securities laws regarding “best execution,” and
    • avoid making misleading statements about investment transactions and other relevant matters,
  • adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and to mitigate conflicts of interest that could otherwise cause violations of those standards;
  • document and disclose the specific reasons that any rollover recommendations are in the retirement investor’s best interest; and
  • conduct an annual retrospective compliance review.

Compliance Dates:

Key compliance dates and related information are listed below:

  • The effective date was speculated to be delayed, however was confirmed to go into effect on February 16, 2021. The DOL stated its intentions to revisit PTE 2020-02 and other exemptions relating to advice, yet made clear that the core components of this exemption are fundamental to investor protections and could not be delayed.
  • The Field Assistance Bulletin, “FAB 2018-02” will remain in place until December 20, 2021.
  • The DOL reiterates the conclusion that the Department will not pursue claims for breaches of fiduciary duty of prohibited transactions between 2005 and February 16, 2021, or treat parties as violating the prohibited transaction rules, based on rollover recommendations that would have been considered non-fiduciary conduct under the reasoning of the Deseret Letter. There will be no extension of this enforcement policy beyond February 16, 2021.
  • Regarding regulatory actions on fiduciary advice, the DOL is currently reviewing the law and policy, and has stated it anticipates taking further actions. Such actions include amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking other class exemptions related to investment advice fiduciaries.

Definition of fiduciary investment advice:

The definition of fiduciary advice is clarified in the FAQ:

Under ERISA’s statutory text, a firm or investment professional provides fiduciary investment advice to the extent she “renders investment advice for a fee or other compensation, direct or indirect, with respect to any money or other property of such plan, or has any authority or responsibility to do so.”

RIA firms and other investment professionals can refer to the five-part test, issued in 1975, to determine if a recommendation is considered as investment advice.

Compliance with PTE 2020-02:

SEC and state-registered investment adviser firms are required to provide written acknowledgement of their fiduciary status under Title I of ERISA and the Internal Revenue Code, as applicable, when providing investment advice to a retirement investor, including a written description of the services to be provided as well as any material conflicts of interest. Additionally, the documentation must state the reasons a rollover recommendation is in the best interest of the investor. Written acknowledgement is required to ensure all involved parties, the investment professional and the investor, are aware of the fiduciary nature of the relationship. The exemption preamble contains model language for investment professionals to use to meet the fiduciary acknowledgement requirement.

Advisers are ineligible to rely on the exemption if, within the previous 10 years, they were convicted of crimes arising out of their provision of investment advice to retirement investors. They will also be ineligible if they participated in deliberate violation of the exemption’s conditions or provided materially misleading information to the Department in relation to their conduct under the exemption.

Firms are required to implement policies and procedures to be compliant with Impartial Conduct Standards, to mitigate conflicts of interest, and they must conduct a retrospective review of compliance each year.

In short, The Impartial Conduct Standards are comprised of three components for financial institutions and investment professionals to follow:

  1. provide advice in the Best Interest of the Retirement Investor,
  2. fees must not exceed reasonable compensation and seek the “best execution” of the investment transaction, and
  3. do not make misleading statements about Retirement Investor about the recommended transaction or relevant matters.

Regarding disclosures for conflicts of interest, the DOL indicates that financial institutions must conduct a “careful analysis” to identify their material conflicts and provide a written description of material conflicts to the investor, designed to allow “a reasonable person to assess the scope of severity” of the conflicts of interest.

The DOL specifies the factors to consider and document when identifying reasons that a rollover recommendation is in an investors best interest as the following:

  • the alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted;
  • the fees and expenses associated with both the plan and the IRA;
  • whether the employer pays for some or all of the plan’s administrative expenses; and
  • the different levels of services and investments available under the plan and the IRA.

Investment professionals will need to make considerable efforts to obtain information about the existing employee benefit plan to understand the investors interests, returns, risks, and expenses.

The DOL also discusses the need to for advisers of retirement investments to mitigate conflicts of interest and can do so by eliminating the use of incentives which can place the interest of the adviser before the investor. Such incentives include quotas, bonuses, prizes, and performance standards.

Firms can correct violations of the exemption within 90 days after the firm has been made aware or should have reasonably learned of the violation.

Note: RIA in a Box LLC is not a law firm and does not provide legal advice. We strongly advise that all RIA firms that provide services to individual retirement investors, pension plans, profit sharing plans, and/or retirement plans to consult with a qualified Employee Retirement Income Security Act of 1974 ("ERISA") attorney in matters relating to DOL and ERISA law. This overview is provided for general information purposes only and should not be relied upon to take any action.

Topics: RIA Operations, RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

RIA Compliance & Practice Management

Stay up to date on the latest RIA compliance, operations, and technology topics.

Hear from industry experts as they keep you up to date on the latest regulatory developments and practice management topics.

Subscribe to Email Updates

Recent Posts

POSTS BY TOPIC

cta-ria-compliance

cta-ria-operations

cta-ria-technology