DOL Issues Final Fiduciary Rule

Practical Law Legal Update w-001-8558 (Approx. 18 pages)

DOL Issues Final Fiduciary Rule

by Practical Law Employee Benefits & Executive Compensation

Major Provisions of the Final Rule

The final rule amends the definition of fiduciary investment advice in 29 C.F.R. Section 2510.3-21 and replaces it with a new definition. The final rule contains several modifications and clarifications to the proposed rule in reaction to comments from the industry.

Like the proposed rule, the final rule applies to both ERISA-governed employee benefit plans and IRAs under ERISA Section 3(21)(A)(ii) (29 U.S.C. § 1002(21)(A)(ii)) and Code Section 4975(e)(3)(B) (26 U.S.C. § 4975(e)(3)(B)). The rule is subject to a non-exhaustive list of examples of certain types of communications which are generally not recommendations under the definition and are not fiduciary communications (see Exclusions). The proposed rules classified these examples as carve-outs, but the final rule explains that they are better understood as specific examples of communications that are non-fiduciary because they fall short of constituting recommendations under the final rule. The DOL has also revised the accompanying prohibited transaction exemptions (PTEs) (see Prohibited Transaction Exemptions).

The final rules retain the same framework as the proposed rule, with certain modifications and clarifications. It provides that, with the exception of certain communications, a person provides investment advice if, for a fee or other compensation, he provides certain categories or types of advice. The categories or types of advice include several changes from the proposed rule to include:

A recommendation about the investment of plan or IRA assets, including:
- the advisability of acquiring, holding, disposing of, or exchanging securities or other investment property (see Advice Regarding Money or Other Property); or
- how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA (see Rollovers and Distribution Advice).
A recommendation about investment management of the plan, including:
- the management of securities or other investment property, including recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice, or investment management services;
- selection of investment account arrangements; or
- rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination the rollover, transfer, or distribution should be made.

(See Management of Securities or Other Investment Property and Recommendations of Investment Managers or Advisers.)

In addition, the final rule clarifies the types of arrangements that must exist for recommendations to give rise to fiduciary investment advice responsibilities. Specifically, to be a fiduciary, the person must either:

Represent or acknowledge that it is acting as a fiduciary within the meaning of ERISA or the Code regarding the advice.
Render the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the recipient.
Direct the recommendation to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

Advice Regarding Money or Other Property; Applicability to Health and Disability Arrangements

Under changes in the final rule, the DOL clarified that to render investment advice with respect to money or other property of a plan or IRA, the adviser must make a recommendation about either the advisability of acquiring, holding, disposing, or exchanging securities or other investment property or the management or manager of securities or other investment property.

In addition, the DOL acknowledged uncertainty among commenters as to whether advice regarding money or other property included advice about the purchase of health, disability, and term life insurance policies to provide benefits to plan participants or IRA owners. According to the DOL, it was not their intent to treat advice regarding the purchase of health, disability, and term life insurance policies to provide benefits to plan participants or IRA owners as fiduciary investment advice, provided that these policies do not have an investment component.

As a result, the final rule adds a new provision that defines investment property as expressly excluding (to the extent these arrangements do not include an investment component):

Health or disability insurance policies.
Term life insurance policies.
Other assets.

(29 C.F.R. § 2510.3-21(g)(4).)

Applicability to Health Savings Accounts

In preamble material accompanying the final rule, the DOL indicated that it received extensive comments regarding whether the rule should apply to certain non-ERISA plans covered by Code Section 4975 (26 U.S.C. § 4975), including:

Health Savings Accounts (HSAs) and Archer medical savings accounts (Archer MSAs) (see Practice Note, Defined Contribution Health Plans).
Coverdell Education Savings Accounts.

Regarding HSAs, the DOL noted that:

There may be associated investment accounts that can be used as long term savings accounts for retiree health care expenses.
HSA funds may be invested in investments approved for IRAs (for example, bank accounts, annuities, CDs, stocks, mutual funds, or bonds).
An HSA trust or custodial agreement may restrict investments to certain types of permissible investments (for example, particular investment funds).

Citing the substantial amount of assets in HSAs, the DOL indicated that these account owners needed the same safeguards from conflicted investment advice as IRA owners. As a result, the final rule applies to HSAs, Archer MSAs, and Coverdell Education Savings Accounts (29 C.F.R. § 2510.3-21(g)(6)(ii)).

Rollovers and Distribution Advice

The final rule adopts the provision in the proposed rule and applies to recommendations regarding plan and IRA rollovers. Like the proposed rule, the final rule supersedes Advisory Opinion 2005-23A, which concluded that these recommendations did not constitute fiduciary investment advice (Advisory Opinion No. 2005-23A, (Dec. 7, 2005)).

The final rule clarifies that a distribution recommendation involves either:

Advice to change specific investments in the plan.
Advice to change fees and services directly affecting the return on those investments.

Additionally, the DOL explained that recommendations to take a distribution or rollover to an IRA and recommendations not to take a distribution or to keep assets in the plan should be treated the same in terms of evaluating whether the communication is fiduciary investment advice.

The final rule also details the distinction between recommendations that are fiduciary investment advice and educational and informational materials (see Investment Education).

In response to comments, the final rule also notes that the DOL declined to adopt FINRA Notice 13-45 as a safe harbor for communications on benefit distributions because it did not differentiate between education and advice. It explains that following FINRA and SEC best practices is good practice, but does not give advisers a pass from ERISA fiduciary status.

Management of Securities or Other Investment Property

The final rule adopts the proposed rule on the management of securities or other investment property with certain clarifications. The final rule adds language to clarify the difference between investment recommendations and investment management recommendations. Specifically, it describes management of securities or other investment property as including recommendations on investment policies or strategies, portfolio composition, or recommendations on distributions, including rollovers, from a plan or IRA. It also adds another example to clarify that recommendations to move from commission-based accounts to advisory fee based accounts would be fiduciary investment advice. The final rule notes that this provision is consistent with FINRA guidance in that a recommendation on investment strategies for a fee or other compensation with respect to assets of an employee benefit plan or IRA should be investment advice under ERISA.

Additionally, it clarifies that investment advice also covers recommendations as to proxy voting as well as the management of retirement assets. However, under the final rule, guidelines or other information on voting policies for proxies that are provided to a broad class of investors and not directed at a client's individual interests or investment policy, and are not directed or presented as a recommended policy, would not be considered fiduciary investment advice.

Recommendations of Investment Managers or Advisers

The final rule revises the proposed rule to include the provision on the selection of investment managers or advisers within the section on recommendations about investment management of the plan. The DOL explained that it views the recommendation of another person to provide investment advice or investment management authority over retirement assets to be fiduciary in nature. The final rule includes a new provision that further defines the term recommendation, which requires that the communication, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The final rule also distinguishes between an adviser's marketing of the value of its own advisory or investment management services and making recommendations to retirement investors on how to invest or manage their savings.

Additionally, the DOL explained that the revision to the final rule should not be read to exempt a person from being a fiduciary with respect to any of the investment recommendations covered by other sections of the final rule.

Deletion of Appraisals Section in the Proposed Rule

The final rule does not contain the provision on appraisals that was included in the proposed rule. The DOL noted that it may address appraisal issues in a separate project.

Circumstances Under Which Advice is Provided

The DOL explained that to be a fiduciary a reasonable person must have understood that, under the circumstances, the nature of the relationship was one in which the adviser considered the particular needs of the recipient. To clarify this point, the final rule revises the proposed rule by:

Requiring that advice be directed to a specific recipient or recipients regarding the advisability of a particular investment or management decision.
Including a new provision to make clear that general communications generally are not advice because they are not recommendations within the meaning of the final rule. The DOL noted that it did not view this change as enlarging the definition of investment advice from the proposed rule.

Definition of Recommendation

The final rule explains that it uses a different approach than the proposed rule that expands the definition of recommendation. The approach in the final rule is similar to the one used by FINRA.

The final rule defines recommendation the same as the proposed rule, but includes additional clarifying text. The new text clarifies that:

Whether a recommendation has been made is an objective rather than subjective inquiry. The final rule is consistent with FINRA guidance in that:
- the more individually tailored a communication is the more likely it will be considered a recommendation;
- advice includes providing a selective list of securities as appropriate for a particular investor, even if no recommendation is made about any one security;
- a series of actions that may not constitute recommendations when viewed individually may amount to a recommendation in the aggregate; and
- it makes no difference whether the communication was initiated by a person or a computer software program.
A recommendation requires that a reasonable person would believe that there was a suggestion to make or hold a particular investment or pursue a particular investment strategy.

Exclusions

Like the proposed rule, the final rule includes exclusions for communications and activities that do not constitute recommendations. The proposed rules classified these examples as carve-outs, but the final rule explains that they are better understood as specific examples of communications that are non-fiduciary because they do not meet the definition of investment advice.

The final rule includes the same examples as in the proposed rule, but makes certain changes and additions. Examples include:

Making available a platform of investment alternatives from which an ERISA plan fiduciary selects for an ERISA participant-directed plan (see Platform Providers).
Identifying investment alternatives, responding to requests for proposal (RFPs), or providing objective financial data regarding available alternatives to the plan fiduciary (see Platform Providers).
Information that constitutes "investment education" (see Investment Education).
A new provision on providing general communications that a reasonable person would not view as an investment recommendation (see General Communications).
Statements or recommendations made to a large plan investor with financial expertise by a counterparty acting in an arm's length transaction (see Seller's Exception).
Offers or recommendations to ERISA plan fiduciaries to enter into a swap or security-based swap transaction (see Swap Transactions).
Advice provided to a plan fiduciary by an employee of the plan provided that no fee or other compensation beyond the employee's normal compensation is received (see Employees of Plan Sponsors).

Platform Providers

In response to comments, the final rule makes minor changes to accommodate RFP responses. The final rule clarifies that a RFP response with a sample line-up of investments is not a recommendation, as long as:

Written notice is provided to the plan fiduciary that the person issuing the RFP response is not providing impartial investment advice or giving advice in a fiduciary capacity.
The RFP response discloses whether the person identifying the investment alternatives has a financial interest in any of the alternatives and describes the nature of their interest.

Additionally, the DOL clarified that platforms that are based on objective criteria, such as those targeted at different types of plans in different market segments, do not provide investment advice for purposes of the final rule.

Investment Education

Under the proposed rule, making certain categories of information and materials available did not constitute fiduciary investment advice. The final rule largely adopts the proposed rule's provisions but differentiates between education provided in the plan and IRA markets. It also includes minor changes to clarify that providing information and materials to IRA and plan investors that describe investments or plan alternatives, such as features, terms, fees and expenses, and other characteristics of investment products available, without specifically recommending a particular investment or strategy, qualifies as investment education under the final rule.

In response to comments expressing concern that the proposed rule did not generally allow asset allocation models and interactive investment materials to identify specific investment alternatives and distribution options, the DOL made certain adjustments to the final rule. Specifically, the final rule provides that asset allocation models and interactive investment materials can identify a specific investment product or specific alternative available under the plans if:

The alternative is a designated investment alternative under an employee benefit plan.
The alternative is subject to fiduciary oversight by a plan fiduciary independent of the person who developed or markets the alternative or distribution option.
The asset allocation models and interactive investment materials identify all the other designated investment alternatives available under the plan that have similar risk and return characteristics, if any.
The asset allocation models and interactive investment materials are accompanied by a statement identifying where additional information can be obtained.

If these conditions are satisfied, the communications are considered investment education under the final rule.

The DOL also noted that plan fiduciaries have an obligation under ERISA to evaluate and periodically monitor the asset allocation model and interactive materials being made available to plan participants and beneficiaries.

However, the DOL explained that this provision does not apply in the case of presentations of specific investments to IRA owners because there is a greater likelihood that the guidance would amount to a specific investment recommendation in the IRA context. In the DOL's view, as an allocation becomes narrower and more specific it becomes more likely that the presentation of the portfolio is a recommendation under the final rule. However, the DOL provided that an asset allocation model for an IRA could still qualify as investment education if it described:

A hypothetical customer's portfolio as having certain percentages of investment in equity securities, fixed-income securities, and cash equivalents.
A hypothetical portfolio based on broad-based market sectors.

General Communications

The final rule includes a new provision that includes general communications as an example of communications that are not considered recommendations. The provision excludes general communications that a reasonable person would not view as an investment recommendation. These communications include:

General circulation newsletters.
Television, radio, and public media talk show commentary.
Remarks in widely attended speeches and conferences.
Research reports prepared for general distribution.
General marketing materials.
General market data, including data on market performance, market indices, or trading volumes.
Price quotes.
Performance reports.
Prospectuses.

Seller's Exception

The proposed rule contained a seller's exception for advice provided in connection with an arm's length sale, purchase, loan, or bilateral contract between an expert plan investor and the adviser. As a proxy for financial expertise, the proposed rule required that the advice recipient be a fiduciary of a plan with 100 or more participants or have responsibility for managing at least $100 million in plan assets. The proposed rule did not extend the seller's exception to recommendations made to retail investors and small plan providers.

According to the DOL, the criteria in the proposed rule did not appropriately distinguish non-fiduciary communications made at arm's length from instances where customers should expect that recommendations were unbiased advice made in their best interest. As a result, the final rule contains several modifications from the proposed rule. However, like the proposed rule, the final rule does not extend to recommendations made to retail investors and small plan providers.

In creating this provision of the final rule, the DOL considered certain FINRA guidance. Under the final rule, the seller's exception applies to communications with plan or IRA fiduciaries who are:

Independent from the person providing the advice.
Either:
- licensed and regulated providers of financial services; or
- plan fiduciaries with responsibility for the management of $50 million in assets (inclusive of all plan and non-plan assets under management).

The final rule provides that a person will not be considered a fiduciary simply by providing advice to an independent person who is a fiduciary of the plan or IRA through an arm's length transaction involving the investment of securities or other property if the person providing the advice reasonably believes that they are dealing with an independent fiduciary who is:

A bank or similar institution.
An insurance carrier.
An investment adviser registered under the Investment Advisers Act of 1940.
A broker-dealer registered under the Securities Exchange Act of 1934.
Any other person acting as an independent fiduciary that holds, or has under management or control, total assets of at least $50 million.

For purposes of the final rule, whether a person is independent depends on certain factors that would limit their ability to carry out its fiduciary responsibility.

The final rule also provides additional conditions to ensure that the final rule is limited to true arm's length transactions. Specifically, the person must:

Fairly inform the independent plan fiduciary that the person is not providing impartial investment advice or giving advice in a fiduciary capacity.
Fairly inform the independent plan fiduciary of the existence and nature of the person's financial interests in the transaction.
Know or reasonably believe that the independent plan fiduciary is capable of evaluating investment risks independently, which may be satisfied by written representations.
Know or reasonably believe that the independent fiduciary is a fiduciary under ERISA or the Code and is responsible for exercising independent judgment in evaluating the transaction, which may be satisfied by written representations.
Not receive a fee or other compensation for providing the advice.

The DOL explained that a person seeking to avoid fiduciary status under this exception has the burden of demonstrating compliance with all applicable requirements.

Swap Transactions

The proposed rule contained an exclusion for offers or recommendations to ERISA plan fiduciaries to enter into a swap or security-based swap transaction. The final rule generally adopts the provision in the proposed rule but clarifies that:

The provision applies to communications and activities in both cleared and uncleared swap and security-based swap transactions.
A person acting as a swap dealer, security-based swap dealer, major swap participant, or major security-based swap participant does not become an investment advice fiduciary as a result of a communication during a swap or security based-swap transaction if:
- the person is not acting as an adviser to the plan;
- the employee benefit plan is represented by an independent plan fiduciary;
- the person does not receive a fee or other compensation in connection with the transaction; and
- before providing any recommendation, the person obtains certain written representations.

Additionally, in reaction to comments, the final rule expressly includes clearing firms in the provision.

Employees of Plan Sponsors

Similar to the proposed rule, the final rule provides an exclusion for advice provided by an employee of the plan sponsor to a plan fiduciary provided that the person receives no fee or other compensation in connection with the advice beyond the employee's normal compensation. The final rule clarifies that employees in a company's payroll, accounting, human resources, and financial departments would not be included as investment advice fiduciaries. Additionally, the exclusion covers certain communications between employees, such as where an employee provides advice to another employee in his capacity as a participant or beneficiary, provided that certain requirements are met.

Additional Changes

The final rule included additional modification from the proposed rule, including:

Amendments to the scope of investment advice fiduciary duty.
Clarification that the final rule supersedes Treas. Reg. Section 54.4975-9 (relating to the definition of fiduciary under the Code).
Revisions to certain definitions.

Prohibited Transaction Exemptions

Concurrently with the final fiduciary rule, the DOL issued the final version of several new administrative class PTEs and amendments to existing PTEs. The intent of these exemptions is to allow broker-dealers, insurance agents, and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation that would otherwise violate the prohibited transaction rules of ERISA and trigger excise taxes under the Code.

Best Interest Contract Exemption

ERISA and the Code generally prohibit fiduciary advisers to retirement plans and IRAs from receiving compensation:

That varies based on their investment advice.
From third parties in connection with their advice.

The final version of the Best Interest Contract Exemption provides relief from prohibited transaction restrictions on compensation received by investment advice fiduciaries as a result of a plan or IRA's purchase, sale, or holding of specifically identified investments (81 Fed. Reg. 21002 (Apr. 8, 2016)). This PTE is designed to promote the provision of investment advice that is in the best interest of retail investors such as plan participants and beneficiaries, IRA owners, and certain plan fiduciaries, including small plan sponsors.

Although the final version of this PTE is similar in scope and function to the proposed version of this PTE, the DOL made numerous changes to the PTE in response to comments on the proposal (for more information on the proposed version of this PTE, see Practice Note, Proposed Best Interest Contract Prohibited Transaction Exemption and Legal Update, Proposed Best Interest Contract Prohibited Transaction Exemption). These changes are intended to ease implementation of this PTE, and they include:

Modifying the definition of investment advice that is in the "best interest" of the retirement investor by adding that the adviser and financial institution act with the care, skill, prudence, and diligence of a prudent person "acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims". The DOL believes that this revision ensures that advice will not be tainted by self-interest.
Modifying the definition of investment advice that is in the "best interest" of the retirement investor by clarifying how a financial institution that limits its offerings to proprietary products can satisfy the best interest standard (the new PTE includes a specific test for satisfying the PTE in those circumstances). Specifically, financial institutions and advisers that recommend only proprietary products or investments that generate third party payments may rely on the exemption if:
- the recommendation is prudent;
- the fees are reasonable;
- the conflicts are disclosed; and
- the conflicts are managed through stringent policies and procedures that keep the adviser's focus on the customer's best interest, rather than any competing financial interest of the adviser or others.
Elimination of the list of limited assets from the definitions section (Section VIII) of the PTE. The proposed PTE contained a list of certain assets classes covered by the PTE which, commentators argued, limited investor choice. The PTE eliminated this list so that advice to invest in all asset classes is covered by the PTE.
Expanding coverage of the PTE to include advice provided to sponsors of small 401(k) plans (plans with less than $50 million in assets). The proposed PTE excluded small plans which commenters argued deprived small businesses of essential advice.
Instituting major revisions of the contract requirement. Under this requirement, the adviser and financial institution state in a written contract that they are fiduciaries under ERISA or the Code, or both, with respect to any investment recommendations, and that they would adhere to impartial conduct standards. The contract also must include warranties and disclosures. Commentators argued that the contract requirement was unwieldy, called for the signature of too many parties, and was required to be executed before the customer even knew that he was going to make an investment. The changes to this requirement include:
- elimination of the contract requirement for ERISA plans and participants (although the impartial conduct standards and disclosure requirements must be met for this PTE to apply);
- not requiring contract execution prior to advisers' recommendations (the contract may now be executed at the time of the recommendation);
- specifically allowing for the required contract terms to be incorporated in account-opening documents;
- providing a negative consent process for existing clients to avoid having to get new signatures from those clients; and
- simplifying execution of the contract by requiring the financial institution to execute the contract rather than also requiring each individual adviser to sign.
Clarifying that the PTE does not ban commissions or mandate rigid fee-leveling by, for example, requiring identical fees for recommendations to invest in insurance products as to invest in mutual funds. The DOL also provided examples of policies and procedures that are compatible with commission-based models. Commentators argued that the proposed PTE would effectively prohibit commissions.
Streamlining compliance for level fee fiduciaries, which are fiduciaries that, together with their affiliates, receive only a level fee for advisory or management services regarding plan or IRA assets, such as a recommendation of a rollover from a plan to an IRA, moving from a commission-based account, or moving from one IRA to another. Level fee fiduciaries include investment advice fiduciaries who provide ongoing advice for a fee based on a fixed percentage of assets under management.
Eliminating the proposed data collection requirement that would have required collection and retention of specified data relating to the financial institution's inflows, outflows, holdings, and returns for retirement investments. Commentators argued that the proposed PTE called for the retention of information that was too detailed and burdensome. The PTE requires only the retention of records that show compliance with the law.
Eliminating or simplying some of the more detailed proposed disclosure requirements, including:
- eliminating the requirement for projections of the total cost of an investment at the point of sale over 1, 5, and 10-year periods, as well as the annual disclosure requirement; and
- simplifying the disclosure conditions and requiring the most detailed customer-specific disclosures to be disclosed only upon request of the customer.
Commentators argued that the proposed PTE was overly cumbersome and the 1, 5, and 10-year projects were nearly impossible to execute.
Providing a mechanism to correct good faith violations of the disclosure conditions so that financial institutions would:
- not lose the benefit of this PTE because of those errors; and
- have an incentive to promptly correct them.
This was implemented so that financial institutions would not lose the benefit of the PTE as a result of a good faith error and would have an incentive to correct them.
Eliminating the proposed requirement of adherence to other state and federal laws relating to advice as unduly expansive and duplicative of other laws.

Transition Period

The final Best Interest Contract PTE includes a transition period between April 10, 2017 (the applicability date of the final fiduciary rule) and January 1, 2018, which also eases the implementation of this PTE. This transition period provides relief from the prohibited transaction restrictions and sanctions under:

ERISA Sections 406(a)(1)(D) and 406(b) (29 U.S.C. §§ 1106(a)(1)(D), 1106(b)).
Code Sections 4975(a) and (b) (26 U.S.C. §§ 4975(a), (b)) by reason of Code Sections 4975(c)(1) (D), (E), and (F) (26 U.S.C. §§ 4975(c)(1)(D), (E), and (F)).

During the transition period, advisers, financial institutions, and their affiliates and related entities may receive compensation for providing investment advice within the meaning of ERISA Section 3(21)(A)(ii) or Code Section 4975(e)(3)(B) to retirement investors (including plan participants and beneficiaries, IRA owners, and non-institutional ("retail") fiduciaries), if the following conditions are met:

When providing investment advice to the retirement investor, the financial institution and the adviser(s) provide investment advice that is, at the time of the recommendation, in the Best Interest of the retirement investor.
The recommended transaction does not cause the financial institution, adviser or their affiliates or related entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2).
Statements by the financial institution and its advisers to the retirement investor about the recommended transaction, fees and compensation, material conflicts of interest, and any other matters relevant to a retirement investor's investment decisions, are not materially misleading at the time they are made.
The financial institution provides to the retirement investor, prior to or at the same time as, the execution of the recommended transaction, a single written disclosure, which may cover multiple transactions or all transactions occurring within the Transition Period.
The financial institution designates a person or persons, identified by name, title or function, responsible for addressing material conflicts of interest and monitoring advisers' adherence to the impartial conduct standards.
The financial institution complies with the recordkeeping requirements of Section V(b) and (c).

These are fewer conditions than will apply after the transition period. The transition period does not apply in certain circumstances, including when:

The plan is covered by Title I of ERISA.
The compensation is received for advice provided in connection with a principal transaction (see Final Principal Transactions Exemption).

Final Principal Transactions Exemption

The final principal transaction exemption permits principal transactions in certain debt securities between a plan or IRA owners and an investment advice fiduciary, under certain circumstances. Principal transactions occur when fiduciaries of employee benefit plans or IRAs purchase and sell investments when the fiduciaries are acting on behalf of their own accounts.

The final exemption is similar to the proposed principal transaction exemption issued in April 2015 (for more information on the proposed PTE, see Legal Update, Proposed Principal Transactions Prohibited Transaction Exemption). In finalizing this PTE, the DOL made several changes, mostly in response to comments, to ease implementation, including:

Eliminating the contract requirement for ERISA investors and simplifying the mechanics of contract-formation for IRAs and plans not covered by Title I of ERISA.
For new customers, the required contract terms may simply be incorporated in the financial institution's account opening documents and similar commonly-used agreements.
Permitting reliance on a negative consent process for existing contract holders.
Requiring only the financial institution to execute the contract, rather than each of the individual advisers from whom the retirement investor receives advice.
Not requiring execution of the contract at the start of conversations between investors and advisers, as long as the contract is entered into before or at the same time as the recommended transaction.
Eliminating:
- some of the conditions that were not critical to the exemption's protective purposes, and expanding the scope of the exemption's coverage (by covering interests in unit investment trusts (UITs) and certificates of deposit (CDs), for example);
- the requirement of adherence to other state and federal laws relating to advice; and
- the requirement to include a mark-up or mark-down as part of the written confirmation of the principal transaction under Rule 10b-10 under the Securities Exchange Act of 1934.
Clarifying that this exemption is available for riskless principal transactions involving principal traded assets.
Changing the fiduciary acknowledgment provision to clarify that the acknowledgment can be limited to:
- investment recommendations subject to the contract; or
- for an ERISA plan, any investment recommendations regarding the plan or beneficiary or participant account.
Revising the impartial conduct standards to provide that:
- the adviser and financial institution must seek to obtain the best execution reasonably available under the circumstances. The proposed PTE required that the purchase or sales price could not be unreasonable under the circumstances; and
- statements by the financial institution and its advisers to the retirement investor about the recommended transaction, fees and compensation, material conflicts of interest, and any other matters relevant to a retirement investor's investment decision to engage in a principal transaction or a riskless principal transaction, may not be materially misleading at the time they are made.
Amending the contractual disclosure requirements.
Providing a mechanism for correcting good faith violations of the disclosure requirements.
Revising the recordkeeping requirements to clarify that:
- the records must be "reasonably accessible for examination"; and
- fiduciaries, employers, employee organizations, participants, and their employees and representatives only have access to information concerning their own plans.

Transition Period

The Principal Transactions PTE has an applicability date of April 10, 2017. To ease adoption of the final PTE, there is a transition period between April 10, 2017 and January 1, 2018. During the Transition Period, financial institutions and advisers are entitled to full relief from the exemption if they comply with limited conditions (rather than the full set of conditions) in the exemption.

Other PTEs Affected by the Final Rule

In conjunction with the final rule, the DOL also issued final amendments to:

PTE 84-24 (81 Fed. Reg. 21147 (Apr. 8, 2016)).
PTE 86-128 (81 Fed. Reg. 21181 (Apr. 8, 2016)).
PTE 75-1 (81 Fed. Reg. 21181 (Apr. 8, 2016); 81 Fed. Reg. 21139 (Apr. 8, 2016); 81 Fed. Reg. 21208 (Apr. 8, 2016)).
PTE 77-4, 80-83 and 83-1 (81 Fed. Reg. 21208 (Apr. 8, 2016)).

These PTEs are amended and in some cases partially revoked, largely as a result of the Best Interest Contract PTE.

Effective Date

The final rule is effective June 7, 2016. The applicability date is April 10, 2017.

Practical Implications

The final rule contains several modifications and clarifications that should ease the application of some of the provisions contained in the proposed rule. In particular, the final rule should be helpful with providing investment education to retirement plan participants and better clarify whether a person has made a recommendation covered by the final rule. Employers sponsoring affected plans should make themselves familiar with the changes between the proposed rule and the final rule in order to comply with the new requirements.

DOL Issues Final Fiduciary Rule | Practical Law