Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1, 21208-21221 [2016-07930]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 81, Number 68 (Friday, April 8, 2016)]
[Rules and Regulations]
[Pages 21208-21221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07930]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application Number D-11820]
ZRIN 1210-ZA25


Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1

AGENCY: Employee Benefits Security Administration (EBSA), U.S. 
Department of Labor.

ACTION: Adoption of Amendments to Class Exemptions.

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SUMMARY: This document contains amendments to prohibited transaction 
exemptions (PTEs) 75-1, 77-4, 80-83 and 83-1. Generally, the Employee 
Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue 
Code (the Code) prohibit fiduciaries with respect to employee benefit 
plans and individual retirement accounts (IRAs) from engaging in self-
dealing, including using their authority, control or responsibility to 
affect or increase their own compensation. These exemptions generally 
permit fiduciaries to receive compensation or other benefits as a 
result of the use of their fiduciary authority, control or 
responsibility in connection with investment transactions involving 
plans or IRAs. The amendments require the fiduciaries to satisfy 
uniform Impartial Conduct Standards in order to obtain the relief 
available under each exemption. The amendments affect participants and 
beneficiaries of plans, IRA owners, and fiduciaries with respect to 
such plans and IRAs.

DATES: Issuance date: These amendments are issued June 7, 2016.
    Applicability date: These amendments are applicable to transactions 
occurring on or after April 10, 2017.

FOR FURTHER INFORMATION CONTACT: Brian Shiker, Linda Hamilton or Susan 
Wilker, Office of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor, (202) 693-8824 (this is not a 
toll-free number).

SUPPLEMENTARY INFORMATION: The Department is amending the class 
exemptions on its own motion, pursuant to ERISA section 408(a) and Code 
section 4975(c)(2), and in accordance with the procedures set forth in 
29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)).

Executive Summary

Purpose of Regulatory Action

    The Department grants these amendments to PTEs 75-1, 77-4, 80-83 
and 83-1 in connection with its publication today, elsewhere in this 
issue of the Federal Register, of a final regulation defining who is a 
``fiduciary'' of an employee benefit plan under ERISA as a result of 
giving investment advice to a plan or its participants or beneficiaries 
(Regulation). The Regulation also applies to the definition of a 
``fiduciary'' of a plan (including an IRA) under the Code. The 
Regulation amends a prior regulation, dating to 1975, specifying when a 
person is a ``fiduciary'' under ERISA and the Code by reason of the 
provision of investment advice for a fee or other compensation 
regarding assets of a plan or IRA. The Regulation takes into account 
the advent of 401(k) plans and IRAs, the dramatic increase in 
rollovers, and other developments that have transformed the retirement 
plan landscape and the associated investment market over the four 
decades since the existing regulation was issued. In light of the 
extensive changes in retirement investment practices and relationships, 
the Regulation updates existing rules to distinguish more appropriately 
between the sorts of advice relationships that should be treated as 
fiduciary in nature and those that should not.
    In connection with the adoption of the Regulation, PTEs 75-1, Part 
III, 75-1, Part IV, 77-4, 80-83 and 83-1 are amended to increase the 
safeguards of the exemptions. As amended, new ``Impartial Conduct 
Standards'' are made conditions of the exemptions. Fiduciaries are 
required to act in accordance with these standards in transactions 
permitted by the exemptions. The standards are incorporated in multiple 
class exemptions, including the exemptions that are the subject of this 
notice, other existing exemptions, and two new exemptions published 
elsewhere in this issue of the Federal Register, to ensure that 
fiduciaries relying on the exemptions are held to a uniform set of 
standards and that these standards are applicable to transactions 
involving both plans and IRAs. The amendments apply prospectively to 
fiduciaries relying on the exemptions.
    ERISA section 408(a) specifically authorizes the Secretary of Labor 
to grant and amend administrative exemptions from ERISA's prohibited 
transaction provisions.\1\ Regulations at 29 CFR 2570.30 to 2570.52 
describe the procedures for applying for an administrative exemption. 
In amending these exemptions, the Department has determined that the 
amended exemptions are administratively feasible, in the interests of 
plans and their participants and beneficiaries and IRA owners, and 
protective of the rights of participants and beneficiaries of plans and 
IRA owners.
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    \1\ Code section 4975(c)(2) authorizes the Secretary of the 
Treasury to grant exemptions from the parallel prohibited 
transaction provisions of the Code. Reorganization Plan No. 4 of 
1978 (5 U.S.C. app. at 214 (2000)) (``Reorganization Plan'') 
generally transferred the authority of the Secretary of the Treasury 
to grant administrative exemptions under Code section 4975 to the 
Secretary of Labor. To rationalize the administration and 
interpretation of dual provisions under ERISA and the Code, the 
Reorganization Plan divided the interpretive and rulemaking 
authority for these provisions between the Secretaries of Labor and 
of the Treasury, so that, in general, the agency with responsibility 
for a given provision of Title I of ERISA would also have 
responsibility for the corresponding provision in the Code. Among 
the sections transferred to the Department were the prohibited 
transaction provisions and the definition of a fiduciary in both 
Title I of ERISA and in the Code. ERISA's prohibited transaction 
rules, 29 U.S.C. 1106-1108, apply to ERISA-covered plans, and the 
Code's corresponding prohibited transaction rules, 26 U.S.C. 
4975(c), apply both to ERISA-covered pension plans that are tax-
qualified pension plans, as well as other tax-advantaged 
arrangements, such as IRAs, that are not subject to the fiduciary 
responsibility and prohibited transaction rules in ERISA. 
Specifically, section 102(a) of the Reorganization Plan provides the 
Department of Labor with ``all authority'' for ``regulations, 
rulings, opinions, and exemptions under section 4975 [of the Code]'' 
subject to certain exceptions not relevant here. Reorganization Plan 
section 102. In President Carter's message to Congress regarding the 
Reorganization Plan, he made explicitly clear that as a result of 
the plan, ``Labor will have statutory authority for fiduciary 
obligations. . . . Labor will be responsible for overseeing 
fiduciary conduct under these provisions.'' Reorganization Plan, 
Message of the President. This exemption provides relief from the 
indicated prohibited transaction provisions of both ERISA and the 
Code.
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Summary of the Major Provisions

    This notice amends prohibited transaction exemptions 75-1, Part 
III,

[[Page 21209]]

75-1, Part IV, 77-4, 80-83 and 83-1. Each amendment incorporates the 
same Impartial Conduct Standards. Generally stated, the Impartial 
Conduct Standards require fiduciaries to: Act in the ``best interest'' 
of plans and IRAs; charge no more than reasonable compensation; and 
make no misleading statements to the plan or IRA, when engaging in the 
transactions that are the subject of these exemptions. The amendments 
require a fiduciary that satisfies ERISA section 3(21)(A)(i) or (ii), 
or the corresponding provisions of Code section 4975(e)(3)(A) or (B), 
with respect to the assets involved in the investment transaction, to 
meet the standards with respect to the investment transactions 
described in the applicable exemption.

Executive Order 12866 and 13563 Statement

    Under Executive Orders 12866 and 13563, the Department must 
determine whether a regulatory action is ``significant'' and therefore 
subject to the requirements of the Executive Order and subject to 
review by the Office of Management and Budget (OMB). Executive Orders 
12866 and 13563 direct agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). Executive Order 13563 emphasizes the 
importance of quantifying both costs and benefits, of reducing costs, 
of harmonizing and streamlining rules, and of promoting flexibility. It 
also requires federal agencies to develop a plan under which the 
agencies will periodically review their existing significant 
regulations to make the agencies' regulatory programs more effective or 
less burdensome in achieving their regulatory objectives.
    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to the requirements of the Executive Order and review by the 
OMB. Section 3(f) of Executive Order 12866, defines a ``significant 
regulatory action'' as an action that is likely to result in a rule (1) 
having an annual effect on the economy of $100 million or more, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant'' regulatory actions); (2) 
creating serious inconsistency or otherwise interfering with an action 
taken or planned by another agency; (3) materially altering the 
budgetary impacts of entitlement grants, user fees, or loan programs or 
the rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. 
Pursuant to the terms of the Executive Order, OMB has determined that 
this action is ``significant'' within the meaning of Section 3(f)(4) of 
the Executive Order. Accordingly, the Department has undertaken an 
assessment of the costs and benefits of the proposal, and OMB has 
reviewed this regulatory action. The Department's complete Regulatory 
Impact Analysis is available at www.dol.gov/ebsa.

Background

Regulation Defining a Fiduciary

    As explained more fully in the preamble to the Regulation, ERISA is 
a comprehensive statute designed to protect the interests of plan 
participants and beneficiaries, the integrity of employee benefit 
plans, and the security of retirement, health, and other critical 
benefits. The broad public interest in ERISA-covered plans is reflected 
in its imposition of fiduciary responsibilities on parties engaging in 
important plan activities, as well as in the tax-favored status of plan 
assets and investments. One of the chief ways in which ERISA protects 
employee benefit plans is by requiring that plan fiduciaries comply 
with fundamental obligations rooted in the law of trusts. In 
particular, plan fiduciaries must manage plan assets prudently and with 
undivided loyalty to the plans and their participants and 
beneficiaries.\2\ In addition, they must refrain from engaging in 
``prohibited transactions,'' which ERISA does not permit because of the 
dangers posed by the fiduciaries' conflicts of interest with respect to 
the transactions.\3\ When fiduciaries violate ERISA's fiduciary duties 
or the prohibited transaction rules, they may be held personally liable 
for the breach.\4\ In addition, violations of the prohibited 
transaction rules are subject to excise taxes under the Code.
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    \2\ ERISA section 404(a).
    \3\ ERISA section 406. ERISA also prohibits certain transactions 
between a plan and a ``party in interest.''
    \4\ ERISA section 409; see also ERISA section 405.
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    The Code also has rules regarding fiduciary conduct with respect to 
tax-favored accounts that are not generally covered by ERISA, such as 
IRAs. In particular, fiduciaries of these arrangements, including IRAs, 
are subject to the prohibited transaction rules, and, when they violate 
the rules, to the imposition of an excise tax enforced by the Internal 
Revenue Service. Unlike participants in plans covered by Title I of 
ERISA, IRA owners do not have a statutory right to bring suit against 
fiduciaries for violations of the prohibited transaction rules.
    Under this statutory framework, the determination of who is a 
``fiduciary'' is of central importance. Many of ERISA's and the Code's 
protections, duties, and liabilities hinge on fiduciary status. In 
relevant part, ERISA section 3(21)(A) and Code section 4975(e)(3) 
provide that a person is a fiduciary with respect to a plan or IRA to 
the extent he or she (1) exercises any discretionary authority or 
discretionary control with respect to management of such plan or IRA, 
or exercises any authority or control with respect to management or 
disposition of its assets; (2) renders investment advice for a fee or 
other compensation, direct or indirect, with respect to any moneys or 
other property of such plan or IRA, or has any authority or 
responsibility to do so; or, (3) has any discretionary authority or 
discretionary responsibility in the administration of such plan or IRA.
    The statutory definition deliberately casts a wide net in assigning 
fiduciary responsibility with respect to plan and IRA assets. Thus, 
``any authority or control'' over plan or IRA assets is sufficient to 
confer fiduciary status, and any persons who render ``investment advice 
for a fee or other compensation, direct or indirect'' are fiduciaries, 
regardless of whether they have direct control over the plan's or IRA's 
assets and regardless of their status as an investment adviser or 
broker under the federal securities laws. The statutory definition and 
associated responsibilities were enacted to ensure that plans, plan 
participants, and IRA owners can depend on persons who provide 
investment advice for a fee to provide recommendations that are 
untainted by conflicts of interest. In the absence of fiduciary status, 
the providers of investment advice are neither subject to ERISA's 
fundamental fiduciary standards, nor accountable under ERISA or the 
Code for imprudent, disloyal, or biased advice.
    In 1975, the Department issued a regulation, at 29 CFR 2510.3-21(c) 
defining the circumstances under which a person is treated as providing 
``investment advice'' to an employee benefit plan within the meaning of 
ERISA section 3(21)(A)(ii) (the ``1975

[[Page 21210]]

regulation'').\5\ The 1975 regulation narrowed the scope of the 
statutory definition of fiduciary investment advice by creating a five-
part test for fiduciary advice. Under the 1975 regulation, for advice 
to constitute ``investment advice,'' an adviser 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 or a plan fiduciary that (4) the advice will serve as a primary 
basis for investment decisions with respect to plan assets, and that 
(5) the advice will be individualized based on the particular needs of 
the plan. The 1975 regulation provided that an adviser is a fiduciary 
with respect to any particular instance of advice only if he or she 
meets each and every element of the five-part test with respect to the 
particular advice recipient or plan at issue.
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    \5\ The Department of Treasury issued a virtually identical 
regulation, at 26 CFR 54.4975-9(c), which interprets Code section 
4975(e)(3).
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    The market for retirement advice has changed dramatically since the 
Department first promulgated the 1975 regulation. Individuals, rather 
than large employers and professional money managers, have become 
increasingly responsible for managing retirement assets as IRAs and 
participant-directed plans, such as 401(k) plans, have supplanted 
defined benefit pensions. At the same time, the variety and complexity 
of financial products have increased, widening the information gap 
between advisers and their clients. Plan fiduciaries, plan participants 
and IRA investors must often rely on experts for advice, but are unable 
to assess the quality of the expert's advice or effectively guard 
against the adviser's conflicts of interest. This challenge is 
especially true of retail investors with smaller account balances who 
typically do not have financial expertise, and can ill-afford lower 
returns to their retirement savings caused by conflicts. The IRA 
accounts of these investors often account for all or the lion's share 
of their assets and can represent all of savings earned for a lifetime 
of work. Losses and reduced returns can be devastating to the investors 
who depend upon such savings for support in their old age. As baby 
boomers retire, they are increasingly moving money from ERISA-covered 
plans, where their employer has both the incentive and the fiduciary 
duty to facilitate sound investment choices, to IRAs where both good 
and bad investment choices are myriad and advice that is conflicted is 
commonplace. These rollovers are expected to approach $2.4 trillion 
cumulatively from 2016 through 2020.\6\ These trends were not apparent 
when the Department promulgated the 1975 regulation. At that time, 
401(k) plans did not yet exist and IRAs had only just been authorized.
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    \6\ Cerulli Associates, ``Retirement Markets 2015.''
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    As the marketplace for financial services has developed in the 
years since 1975, the five-part test has now come to undermine, rather 
than promote, the statutes' text and purposes. The narrowness of the 
1975 regulation has allowed advisers, brokers, consultants and 
valuation firms to play a central role in shaping plan and IRA 
investments, without ensuring the accountability that Congress intended 
for persons having such influence and responsibility. Even when plan 
sponsors, participants, beneficiaries and IRA owners clearly relied on 
paid advisers for impartial guidance, the 1975 regulation has allowed 
many advisers to avoid fiduciary status and disregard basic fiduciary 
obligations of care and prohibitions on disloyal and conflicted 
transactions. As a consequence, these advisers have been able to steer 
customers to investments based on their own self-interest (e.g., 
products that generate higher fees for the adviser even if there are 
identical lower-fee products available), give imprudent advice, and 
engage in transactions that would otherwise be prohibited by ERISA and 
the Code without fear of accountability under either ERISA or the Code.
    In the Department's amendments to the 1975 regulation defining 
fiduciary advice within the meaning of ERISA section 3(21)(A)(ii) and 
Code section 4975(e)(3)(B) (the ``Regulation'') which are also 
published in this issue of the Federal Register, the Department is 
replacing the existing regulation with one that more appropriately 
distinguishes between the sorts of advice relationships that should be 
treated as fiduciary in nature and those that should not, in light of 
the legal framework and financial marketplace in which IRAs and plans 
currently operate.\7\
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    \7\ The Department initially proposed an amendment to its 
regulation defining a fiduciary within the meaning of ERISA section 
3(21)(A)(ii) and Code section 4975(e)(3)(B) on October 22, 2010, at 
75 FR 65263. It subsequently announced its intention to withdraw the 
proposal and propose a new rule, consistent with the President's 
Executive Orders 12866 and 13563, in order to give the public a full 
opportunity to evaluate and comment on the new proposal and updated 
economic analysis. The first proposed amendment to the rule was 
withdrawn on April 20, 2015, see 80 FR 21927.
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    The Regulation describes the types of advice that constitute 
``investment advice'' with respect to plan or IRA assets for purposes 
of the definition of a fiduciary at ERISA section 3(21)(A)(ii) and Code 
section 4975(e)(3)(B). The Regulation covers ERISA-covered plans, IRAs, 
and other plans not covered by Title I of ERISA, such as Keogh plans, 
and health savings accounts described in section 223(d) of the Code.
    As amended, the Regulation provides that a person renders 
investment advice with respect to assets of a plan or IRA if, among 
other things, the person provides, directly to a plan, a plan 
fiduciary, plan participant or beneficiary, IRA or IRA owner, the 
following types of advice, for a fee or other compensation, whether 
direct or indirect:
    (i) A recommendation as to the advisability of acquiring, holding, 
disposing of, or exchanging, securities or other investment property, 
or a recommendation as to 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; and
    (ii) A recommendation as to the management of securities or other 
investment property, including, among other things, recommendations on 
investment policies or strategies, portfolio composition, selection of 
other persons to provide investment advice or investment management 
services, types of investment account arrangements (brokerage versus 
advisory), or recommendations with respect to rollovers, transfers or 
distributions from a plan or IRA, including whether, in what amount, in 
what form, and to what destination such a rollover, transfer or 
distribution should be made.
    In addition, in order to be treated as a fiduciary, such person, 
either directly or indirectly (e.g., through or together with any 
affiliate), must: Represent or acknowledge that it is acting as a 
fiduciary within the meaning of ERISA or the Code with respect to the 
advice described; represent or acknowledge that it is acting as a 
fiduciary within the meaning of ERISA or the Code; 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 
advice recipient; or direct the advice to a specific advice recipient 
or recipients regarding the advisability of a particular investment or 
management decision with respect to securities or

[[Page 21211]]

other investment property of the plan or IRA.
    The Regulation also provides that as a threshold matter in order to 
be fiduciary advice, the communication must be a ``recommendation'' as 
defined therein. The Regulation, as a matter of clarification, provides 
that a variety of other communications do not constitute 
``recommendations,'' including non-fiduciary investment education; 
general communications; and specified communications by platform 
providers. These communications which do not rise to the level of 
``recommendations'' under the Regulation are discussed more fully in 
the preamble to the final Regulation.
    The Regulation also specifies certain circumstances where the 
Department has determined that a person will not be treated as an 
investment advice fiduciary even though the person's activities 
technically may satisfy the definition of investment advice. For 
example, the Regulation contains a provision excluding recommendations 
to independent fiduciaries with financial expertise that are acting on 
behalf of plans or IRAs in arm's length transactions, if certain 
conditions are met. The independent fiduciary must be a bank, insurance 
carrier qualified to do business in more than one state, investment 
adviser registered under the Investment Advisers Act of 1940 or by a 
state, broker-dealer registered under the Securities Exchange Act of 
1934 (Exchange Act), or any other independent fiduciary that holds, or 
has under management or control, assets of at least $50 million, and: 
(1) The person making the recommendation must know or reasonably 
believe that the independent fiduciary of the plan or IRA is capable of 
evaluating investment risks independently, both in general and with 
regard to particular transactions and investment strategies (the person 
may rely on written representations from the plan or independent 
fiduciary to satisfy this condition); (2) the person must fairly inform 
the independent fiduciary that the person is not undertaking to provide 
impartial investment advice, or to give advice in a fiduciary capacity, 
in connection with the transaction and must fairly inform the 
independent fiduciary of the existence and nature of the person's 
financial interests in the transaction; (3) the person must know or 
reasonably believe that the independent fiduciary of the plan or IRA is 
a fiduciary under ERISA or the Code, or both, with respect to the 
transaction and is responsible for exercising independent judgment in 
evaluating the transaction (the person may rely on written 
representations from the plan or independent fiduciary to satisfy this 
condition); and (4) the person cannot receive a fee or other 
compensation directly from the plan, plan fiduciary, plan participant 
or beneficiary, IRA, or IRA owner for the provision of investment 
advice (as opposed to other services) in connection with the 
transaction.
    Similarly, the Regulation provides that the provision of any advice 
to an employee benefit plan (as described in ERISA section 3(3)) by a 
person who is a swap dealer, security-based swap dealer, major swap 
participant, major security-based swap participant, or a swap clearing 
firm in connection with a swap or security-based swap, as defined in 
section 1a of the Commodity Exchange Act (7 U.S.C. 1a) and section 3(a) 
of the Exchange Act (15 U.S.C. 78c(a)) is not investment advice if 
certain conditions are met. Finally, the Regulation describes certain 
communications by employees of a plan sponsor, plan, or plan fiduciary 
that would not cause the employee to be an investment advice fiduciary 
if certain conditions are met.

Prohibited Transactions

    The Department anticipates that the Regulation will cover many 
investment professionals who did not previously consider themselves to 
be fiduciaries under ERISA or the Code. Under the Regulation, these 
entities will be subject to the prohibited transaction restrictions in 
ERISA and the Code that apply specifically to fiduciaries. ERISA 
section 406(a)(1)(A)-(D) and Code section 4975(c)(1)(A)-(D) prohibit 
certain transactions between plans or IRAs and ``parties in interest,'' 
as defined in ERISA section 3(14), or ``disqualified persons,'' as 
defined in Code section 4975(e)(2). Fiduciaries and other service 
providers are parties in interest and disqualified persons under ERISA 
and the Code. As a result, they are prohibited from engaging in (1) the 
sale, exchange or leasing of property with a plan or IRA, (2) the 
lending of money or other extension of credit to a plan or IRA, (3) the 
furnishing of goods, services or facilities to a plan or IRA and (4) 
the transfer to or use by or for the benefit of a party in interest of 
plan assets.
    ERISA section 406(b)(1) and Code section 4975(c)(1)(E) prohibit a 
fiduciary from dealing with the income or assets of a plan or IRA in 
his or her own interest or his or her own account. ERISA section 
406(b)(2), which does not apply to IRAs, provides that a fiduciary 
shall not ``in his individual or in any other capacity act in any 
transaction involving the plan on behalf of a party (or represent a 
party) whose interests are adverse to the interests of the plan or the 
interests of its participants or beneficiaries.'' ERISA section 
406(b)(3) and Code section 4975(c)(1)(F) prohibit a fiduciary from 
receiving any consideration for his own personal account from any party 
dealing with the plan or IRA in connection with a transaction involving 
assets of the plan or IRA.
    Parallel regulations issued by the Departments of Labor and the 
Treasury explain that these provisions impose on fiduciaries of plans 
and IRAs a duty not to act on conflicts of interest that may affect the 
fiduciary's best judgment on behalf of the plan or IRA.\8\ The 
prohibitions extend to a fiduciary causing a plan or IRA to pay an 
additional fee to such fiduciary, or to a person in which such 
fiduciary has an interest that may affect the exercise of the 
fiduciary's best judgment as a fiduciary. Likewise, a fiduciary is 
prohibited from receiving compensation from third parties in connection 
with a transaction involving the plan or IRA.\9\
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    \8\ Subsequent to the issuance of these regulations, 
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2010), divided 
rulemaking and interpretive authority between the Secretaries of 
Labor and the Treasury. The Secretary of Labor was given 
interpretive and rulemaking authority regarding the definition of 
fiduciary under both Title I of ERISA and the Internal Revenue Code. 
Id. section 102(a) (``all authority of the Secretary of the Treasury 
to issue [regulations, rulings opinions, and exemptions under 
section 4975 of the Code] is hereby transferred to the Secretary of 
Labor'')
    \9\ 29 CFR 2550.408b-2(e); 26 CFR 54.4975-6(a)(5).
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    Investment professionals typically receive compensation for 
services to retirement investors in the retail market through a variety 
of arrangements, which would typically violate the prohibited 
transaction rules applicable to plan fiduciaries. These include 
commissions paid by the plan, participant or beneficiary, or IRA, or 
commissions, sales loads, 12b-1 fees, revenue sharing and other 
payments from third parties that provide investment products. A 
fiduciary's receipt of such payments would generally violate the 
prohibited transaction provisions of ERISA section 406(b) and Code 
section 4975(c)(1)(E) and (F) because the amount of the fiduciary's 
compensation is affected by the use of its authority in providing 
investment advice, unless such payments meet the requirements of an 
exemption.

Prohibited Transaction Exemptions

    As the prohibited transaction provisions demonstrate, ERISA and the 
Code strongly disfavor conflicts of interest. In appropriate cases, 
however,

[[Page 21212]]

the statutes provide exemptions from their broad prohibitions on 
conflicts of interest. For example, ERISA section 408(b)(14) and Code 
section 4975(d)(17) specifically exempt transactions involving the 
provision of fiduciary investment advice to a participant or 
beneficiary of an individual account plan or IRA owner if the advice, 
resulting transaction, and the adviser's fees meet stringent conditions 
carefully designed to guard against conflicts of interest.
    In addition, the Secretary of Labor has discretionary authority to 
grant administrative exemptions under ERISA and the Code on an 
individual or class basis, but only if the Secretary first finds that 
the exemptions are (1) administratively feasible, (2) in the interests 
of plans and their participants and beneficiaries and IRA owners, and 
(3) protective of the rights of the participants and beneficiaries of 
such plans and IRA owners. Accordingly, fiduciary advisers may always 
give advice without need of an exemption if they avoid the sorts of 
conflicts of interest that result in prohibited transactions. However, 
when they choose to give advice in which they have a conflict of 
interest, they must rely upon an exemption.
    Pursuant to its exemption authority, the Department has previously 
granted several conditional administrative class exemptions that are 
available to fiduciary advisers in defined circumstances. As a general 
proposition, these exemptions focused on specific advice arrangements 
and provided relief for narrow categories of compensation. Reliance on 
these exemptions is subject to certain conditions that the Department 
has found necessary to protect the interests of plans and IRAs.
    In connection with the development of the Department's Regulation 
under ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B), the 
Department considered public input indicating the need for additional 
prohibited transaction relief for the wide variety of compensation 
structures that exist today in the marketplace for investment 
transactions. After consideration of the issue, the Department proposed 
two new class exemptions and proposed amendments to a number of 
existing exemptions. As part of this initiative, the Department 
proposed to incorporate the Impartial Conduct Standards, described in 
greater detail below, in the new and certain existing exemptions. In 
this regard, the Department proposed to incorporate the Impartial 
Conduct Standards in PTEs 75-1, Part III, 75-1, Part IV, 77-4, 80-83 
and 83-1. These exemptions provide relief for the following specific 
transactions:
     PTE 75-1, Part III \10\ permits a fiduciary to cause a 
plan or IRA to purchase securities from a member of an underwriting 
syndicate other than the fiduciary, when the fiduciary is also a member 
of the syndicate;
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    \10\ Exemptions from Prohibitions Respecting Certain Classes of 
Transactions Involving Employee Benefit Plans and Certain Broker-
Dealers, Reporting Dealers and Banks, 40 FR 50845 (Oct. 31, 1975), 
as amended at 71 FR 5883 (Feb. 3, 2006).
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     PTE 75-1, Part IV \11\ permits a plan or IRA to purchase 
securities in a principal transaction from a fiduciary that is a market 
maker with respect to such securities;
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    \11\ Exemptions from Prohibitions Respecting Certain Classes of 
Transactions Involving Employee Benefit Plans and Certain Broker-
Dealers, Reporting Dealers and Banks, 40 FR 50845 (Oct. 31, 1975), 
as amended at 71 FR 5883 (Feb. 3, 2006).
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     PTE 77-4 \12\ provides relief for a plan's or IRA's 
purchase or sale of open-end investment company shares where the 
investment adviser for the open-end investment company is also a 
fiduciary to the plan or IRA;
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    \12\ Class Exemption for Certain Transactions Between Investment 
Companies and Employee Benefit Plans, 42 FR 18732 (Apr. 8, 1977).
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     PTE 80-83 \13\ provides relief for a fiduciary causing a 
plan or IRA to purchase a security when the proceeds of the securities 
issuance may be used by the issuer to retire or reduce indebtedness to 
the fiduciary or an affiliate; and
---------------------------------------------------------------------------

    \13\ Class Exemption for Certain Transactions Involving Purchase 
of Securities Where Issuer May Use Proceeds to Reduce or Retire 
Indebtedness to Parties in Interest, 45 FR 73189 (Nov. 4, 1980), as 
amended at 67 FR 9483 (March 1, 2002).
---------------------------------------------------------------------------

     PTE 83-1 \14\ provides relief for the sale of certificates 
in an initial issuance of certificates, by the sponsor of a mortgage 
pool to a plan or IRA, when the sponsor, trustee or insurer of the 
mortgage pool is a fiduciary with respect to the plan or IRA assets 
invested in such certificates.
---------------------------------------------------------------------------

    \14\ Class Exemption for Certain Transactions Involving Mortgage 
Pool Investment Trusts, 48 FR 895 (Jan. 7, 1983), as amended at 67 
FR 9483 (March 1, 2002).
---------------------------------------------------------------------------

    The Department's intent in proposing the amendments was to provide 
additional protections for all plans, but most particularly for IRA 
owners. That is because fiduciaries' dealings with IRAs are governed by 
the Code, not by ERISA,\15\ and the Code, unlike ERISA, does not 
directly impose responsibilities of prudence and loyalty on 
fiduciaries. The amendments to the exemptions condition relief on the 
satisfaction of these responsibilities. For purposes of these 
amendments, the term IRA means any account or annuity described in Code 
section 4975(e)(1)(B) through (F), including, for example, an 
individual retirement account described in section 408(a) of the Code 
and a health savings account described in section 223(d) of the 
Code.\16\
---------------------------------------------------------------------------

    \15\ See ERISA section 404.
    \16\ The Department notes that PTE 2002-13 amended PTEs 80-83 
and 83-1 so that the terms ``employee benefit plan'' and ``plan'' 
refer to an employee benefit plan described in ERISA section 3(3) 
and/or a plan described in section 4975(e)(1) of the Code. See 67 FR 
9483 (March 1, 2002). At the same time, in the preamble to PTE 2002-
13, the Department explained that it had determined, after 
consulting with the Internal Revenue Service, that plans described 
in 4975(e)(1) of the Code are included within the scope of relief 
provided by PTEs 75-1 and 77-4, because they were issued jointly by 
the Department and the Service. For simplicity and consistency with 
the other new exemptions and amendments to existing exemptions 
published elsewhere in this issue of the Federal Register, the 
Department uses this specific definition of IRA.
---------------------------------------------------------------------------

    These amended exemptions follow a lengthy public notice and comment 
process, which gave interested persons an extensive opportunity to 
comment on the proposed Regulation and exemption proposals. The 
proposals initially provided for 75-day comment periods, ending on July 
6, 2015, but the Department extended the comment periods to July 21, 
2015. The Department then held four days of public hearings on the new 
regulatory package, including the proposed exemptions, in Washington, 
DC from August 10 to 13, 2015, at which over 75 speakers testified. The 
transcript of the hearing was made available on September 8, 2015, and 
the Department provided additional opportunity for interested persons 
to comment on the proposals or hearing transcript until September 24, 
2015. A total of over 3000 comment letters were received on the new 
proposals. There were also over 300,000 submissions made as part of 30 
separate petitions submitted on the proposal. These comments and 
petitions came from consumer groups, plan sponsors, financial services 
companies, academics, elected government officials, trade and industry 
associations, and others, both in support and in opposition to the 
rule.\17\ The Department has reviewed all comments, and after careful 
consideration of the comments, has decided to grant the amendments to 
the exemptions.
---------------------------------------------------------------------------

    \17\ As used throughout this preamble, the term ``comment'' 
refers to information provided through these various sources, 
including written comments, petitions and witnesses at the public 
hearing.
---------------------------------------------------------------------------

Description of the Amendments

    These amended exemptions require fiduciaries relying on the 
exemptions to comply with fundamental Impartial Conduct Standards. 
Generally stated, the Impartial Conduct Standards require that, in 
connection with the transactions

[[Page 21213]]

covered by the exemptions, the fiduciary acts in the plan's or IRA's 
best interest, does not charge more than reasonable compensation, and 
does not make misleading statements to the plan or IRA about the 
recommended transactions. As defined in the amendments, a fiduciary 
acts in the best interest of a plan or IRA when it acts with the care, 
skill, prudence, and diligence under the circumstances then prevailing 
that a prudent person acting in a like capacity and familiar with such 
matters would use in the conduct of an enterprise of a like character 
and with like aims, based on the investment objectives, risk tolerance, 
financial circumstances, and needs of the plan or IRA, without regard 
to the financial or other interests of the fiduciary, any affiliate 
\18\ or other party.
---------------------------------------------------------------------------

    \18\ In some of the amended exemptions, the text of the Best 
Interest standard does not specifically refer to an affiliate. The 
reference was not necessary in those exemptions because they define 
the term ``fiduciary'' to include ``such fiduciary and any 
affiliates of such fiduciary.''
---------------------------------------------------------------------------

    The Impartial Conduct Standards represent fundamental obligations 
of fair dealing and fiduciary conduct. The concepts of prudence, 
undivided loyalty and reasonable compensation are all deeply rooted in 
ERISA and the common law of agency and trusts.\19\ These longstanding 
concepts of law and equity were developed in significant part to deal 
with the issues that arise when agents and persons in a position of 
trust have conflicting loyalties, and accordingly, are well-suited to 
the problems posed by conflicted investment advice. The phrase 
``without regard to'' is a concise expression of ERISA's duty of 
loyalty, as expressed in section 404(a)(1)(A) of ERISA and applied in 
the context of advice. It is consistent with the formulation stated in 
the common law, and it is consistent with the language used by Congress 
in Section 913(g)(1) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act),\20\ and cited in the Staff of U.S. 
Securities and Exchange Commission ``Study on Investment Advisers and 
Broker-Dealers, As Required by Section 913 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act'' (Jan. 2011) \21\ (SEC staff 
Dodd-Frank Study). The Department notes, however, that the standard is 
not intended to outlaw investment advice fiduciaries' provision of 
advice from investment menus that are restricted on the basis of 
proprietary products or revenue sharing. Finally, the ``reasonable 
compensation'' obligation is already required under ERISA section 
408(b)(2) and Code section 4975(d)(2) of service providers, including 
financial services providers, whether fiduciaries or not.\22\
---------------------------------------------------------------------------

    \19\ See generally ERISA sections 404(a), 408(b)(2); Restatement 
(Third) of Trusts section 78 (2007), and Restatement (Third) of 
Agency section 8.01.
    \20\ Section 913(g) governs ``Standard of Conduct'' and 
subsection (1) provides that ``The Commission may promulgate rules 
to provide that the standard of conduct for all brokers, dealers, 
and investment advisers, when providing personalized investment 
advice about securities to retail customers (and such other 
customers as the Commission may by rule provide), shall be to act in 
the best interest of the customer without regard to the financial or 
other interest of the broker, dealer, or investment adviser 
providing the advice.''
    \21\ Available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf.
    \22\ ERISA section 408(b)(2) and Code section 4975(d)(2) exempt 
certain arrangements between ERISA plans, IRAs, and non-ERISA plans, 
and service providers, that otherwise would be prohibited 
transactions under ERISA section 406 and Code section 4975. 
Specifically, ERISA section 408(b)(2) and Code section 4975(d)(2) 
provide relief from the prohibited transaction rules for service 
contracts or arrangements if the contract or arrangement is 
reasonable, the services are necessary for the establishment or 
operation of the plan or IRA, and no more than reasonable 
compensation is paid for the services.
---------------------------------------------------------------------------

    Under the amendments, the Impartial Conduct Standards are 
conditions of the exemptions with respect to all plans and IRAs. 
Transactions that violate the requirements would not be in the 
interests of or protective of plans and their participants and 
beneficiaries and IRA owners. However, unlike some of the other 
exemptions finalized today in this issue of the Federal Register, there 
is no requirement under these exemptions that parties contractually 
commit to the Impartial Conduct Standards.\23\
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    \23\ The Department also points out that there is no requirement 
in the other exemptions finalized today to contractually warrant 
compliance with applicable federal and state laws, as was proposed. 
However, it is still the Department's view that significant 
violations of applicable federal or state law could also amount to 
violations of the Impartial Conduct Standards, such as the best 
interest standard, in which case, relief would be unavailable for 
transactions occurring in connection with such violations.
---------------------------------------------------------------------------

    The Department received many comments on the proposal to include 
the Impartial Conduct Standards as part of these existing exemptions. A 
number of commenters focused on the Department's authority to impose 
the Impartial Conduct Standards as conditions of the exemptions. 
Commenters' arguments regarding the Impartial Conduct Standards as 
applicable to IRAs and non-ERISA plans were based generally on the fact 
that the standards, as noted above, are consistent with longstanding 
principles of prudence and loyalty set forth in ERISA section 404, but 
which have no counterpart in the Code. Commenters took the position 
that because Congress did not choose to impose the standards of 
prudence and loyalty on fiduciaries with respect to IRAs and non-ERISA 
plans, the Department exceeded its authority in proposing similar 
standards as a condition of relief in a prohibited transaction 
exemption.
    With respect to ERISA plans, commenters stated that Congress' 
separation of the duties of prudence and loyalty (in ERISA section 404) 
from the prohibited transaction provisions (in ERISA section 406), 
showed an intent that the two should remain separate. Commenters 
additionally questioned why the conduct standards were necessary for 
ERISA plans, when such plans already have an enforceable right to 
fiduciary conduct that is both prudent and loyal. Commenters asserted 
that imposing the Impartial Conduct Standards as conditions of the 
exemptions created strict liability for prudence violations.
    Some commenters additionally took the position that Congress, in 
the Dodd-Frank Act, gave the SEC the authority to establish standards 
for broker-dealers and investment advisers and therefore, the 
Department did not have the authority to act in that area.
    The Department disagrees that these amendments to the exemptions 
exceed its authority. The Department has clear authority under ERISA 
section 408(a) and the Reorganization Plan \24\ to grant administrative 
exemptions from the prohibited transaction provisions of both ERISA and 
the Code. Congress gave the Department broad discretion to grant or 
deny exemptions and to craft conditions for those exemptions, subject 
only to the overarching requirement that the exemption be 
administratively feasible, in the interests of plans, plan participants 
and beneficiaries and IRA owners, and protective of their rights.\25\ 
Nothing in ERISA or the Code suggests that the Department is forbidden 
to borrow from time-honored trust-law standards and principles 
developed by the courts to ensure proper fiduciary conduct.
---------------------------------------------------------------------------

    \24\ See fn. 1, supra, discussing of Reorganization Plan No. 4 
of 1978 (5 U.S.C. app. at 214 (2000)).
    \25\ See ERISA section 408(a) and Code section 4975(c)(2).
---------------------------------------------------------------------------

    The Impartial Conduct Standards represent, in the Department's 
view, baseline standards of fundamental fair dealing that must be 
present when fiduciaries make conflicted investment recommendations to 
retirement investors. After careful consideration, the Department 
determined that broad relief could be provided to investment advice 
fiduciaries receiving conflicted compensation only if such fiduciaries 
provided advice in accordance with the

[[Page 21214]]

Impartial Conduct Standards--i.e., if they provided prudent advice 
without regard to the interests of such fiduciaries and their 
affiliates and related entities, in exchange for reasonable 
compensation and without misleading the investors.
    These Impartial Conduct Standards are necessary to ensure that 
advisers' recommendations reflect the best interest of their retirement 
investor customers, rather than the conflicting financial interests of 
the advisers and their financial institutions. As a result, advisers 
and financial institutions bear the burden of showing compliance with 
the exemption and face liability for engaging in a non-exempt 
prohibited transaction if they fail to provide advice that is prudent 
or otherwise in violation of the standards. The Department does not 
view this as a flaw in the exemptions, as commenters suggested, but 
rather as a significant deterrent to violations of important conditions 
under the exemptions.
    The Department similarly disagrees that Congress' directive to the 
SEC in the Dodd-Frank Act limits its authority to establish appropriate 
and protective conditions in the context of a prohibited transaction 
exemption. Section 913 of that Act directs the SEC to conduct a study 
on the standards of care applicable to brokers-dealers and investment 
advisers, and issue a report containing, among other things:

an analysis of whether [sic] any identified legal or regulatory 
gaps, shortcomings, or overlap in legal or regulatory standards in 
the protection of retail customers relating to the standards of care 
for brokers, dealers, investment advisers, persons associated with 
brokers or dealers, and persons associated with investment advisers 
for providing personalized investment advice about securities to 
retail customers.\26\
---------------------------------------------------------------------------

    \26\ Dodd-Frank Act, sec. 913(d)(2)(B).

    Section 913 authorizes, but does not require, the SEC to issue 
rules addressing standards of care for broker-dealers and investment 
advisers for providing personalized investment advice about securities 
to retail customers.\27\ Nothing in the Dodd-Frank Act indicates that 
Congress meant to preclude the Department's regulation of fiduciary 
investment advice under ERISA or its application of such a regulation 
to securities brokers or dealers. To the contrary, Dodd-Frank in 
directing the SEC study specifically directed the SEC to consider the 
effectiveness of existing legal and regulatory standard of care under 
other federal and state authorities.\28\ The Dodd-Frank Act did not 
take away the Department's responsibility with respect the definition 
of fiduciary under ERISA and in the Code; nor did it qualify the 
Department's authority to issue exemptions that are administratively 
feasible, in the interests of plans, participants and beneficiaries, 
and IRA owners, and protective of the rights of participants and 
beneficiaries of the plans and IRA owners.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 80b-11(g)(1).
    \28\ Dodd-Frank Act, sec. 913(b)(1) and (c)(1).
---------------------------------------------------------------------------

    Some commenters suggested that it would be unnecessary to impose 
the Impartial Conduct Standards on advisers with respect to ERISA 
plans, as fiduciaries to these plans already are required to operate 
within similar statutory fiduciary obligations. The Department 
considered this comment but has determined not to eliminate the conduct 
standards as conditions of the exemptions for ERISA plans.
    One of the Department's goals is to ensure equal footing for all 
retirement investors. The SEC staff Dodd-Frank Study required by 
section 913 of the Dodd-Frank Act found that investors were frequently 
confused by the differing standards of care applicable to broker-
dealers and registered investment advisers. The Department hopes to 
minimize such confusion in the market for retirement advice by holding 
fiduciaries to similar standards, regardless of whether they are giving 
the advice to an ERISA plan, IRA, or a non-ERISA plan.
    Moreover, inclusion of the standards as conditions of these 
existing exemptions adds an important additional safeguard for ERISA 
and IRA investors alike because the party engaging in a prohibited 
transaction has the burden of showing compliance with an applicable 
exemption, when violations are alleged.\29\ In the Department's view, 
this burden-shifting is appropriate because of the dangers posed by 
conflicts of interest, as reflected in the Department's Regulatory 
Impact Analysis and the difficulties retirement investors have in 
effectively policing such violations.\30\ One important way for 
financial institutions to ensure that they can meet this burden is by 
implementing strong anti-conflict policies and procedures, and by 
refraining from creating incentives to violate the Impartial Conduct 
Standards. Thus, the standards' treatment as exemption conditions 
creates an important incentive for financial institutions to carefully 
monitor and oversee their advisers' conduct for adherence with 
fiduciary norms.
---------------------------------------------------------------------------

    \29\ See e.g., Fish v. GreatBanc Trust Company, 749 F.3d 671 
(7th Cir. 2014).
    \30\ See Fiduciary Investment Advice Final Rule Regulatory 
Impact Analysis.
---------------------------------------------------------------------------

    Other commenters generally asserted that the Impartial Conduct 
Standards were too vague and would result in the exemption failing to 
meet the ``administratively feasible'' requirement under ERISA section 
408(a) and Code section 4975(c)(2). The Department disagrees with these 
commenters' suggestions that ERISA section 408(a) and Code section 
4975(c)(2) fail to be satisfied by a principles-based approach, or that 
standards are unduly vague. It is worth repeating that the Impartial 
Conduct Standards are built on concepts that are longstanding and 
familiar in ERISA and the common law of trusts and agency. Far from 
requiring adherence to novel standards with no antecedents, the 
exemptions primarily require adherence to well-established fundamental 
obligations of fair dealing and fiduciary conduct. This preamble 
provides specific interpretations and responses to a number of issues 
raised in connection with a number of the Impartial Conduct Standards.
    Comments on each of the Impartial Conduct Standards are discussed 
below. In this regard, the Department notes that some commenters 
focused their comments on the Impartial Conduct Standards in the other 
exemption proposals, including the proposed Best Interest Contract 
Exemption, which is finalized elsewhere in this issue of the Federal 
Register. The Department determined it was important that the 
provisions of the exemptions, including the Impartial Conduct 
Standards, be uniform and compatible across exemptions. For this 
reason, the Department considered all comments made on any of the 
exemption proposals on a consolidated basis, and corresponding changes 
were made across the exemptions. For ease of use, this preamble 
includes the same general discussion of comments as in the Best 
Interest Contract Exemption, despite the fact that some comments 
discussed below were not made directly with respect to the exemptions 
amended in this Notice.

1. Best Interest

    Under the first Impartial Conduct Standard, fiduciaries relying on 
the amended exemptions must act in the best interest of the plan or IRA 
at the time of the exercise of authority (including, in the case of an 
investment advice fiduciary, the recommendation). Best interest is 
defined to mean acting with the care, skill, prudence, and diligence 
under the circumstances then prevailing that a prudent person acting in 
a like capacity and familiar with such

[[Page 21215]]

matters would use in the conduct of an enterprise of a like character 
and with like aims, based on the investment objectives, risk tolerance, 
financial circumstances, and the needs of the plan or IRA, without 
regard to the financial or other interests of the fiduciary or its 
affiliates or any other party.\31\
---------------------------------------------------------------------------

    \31\ As noted above, some of the amended exemptions' Best 
Interest definitions do not include the term ``affiliate,'' since 
the exemption defines the fiduciary to include its affiliate.
---------------------------------------------------------------------------

    The Best Interest standard set forth in the amended exemptions is 
based on longstanding concepts derived from ERISA and the law of 
trusts. It is meant to express the concept, set forth in ERISA section 
404 that a fiduciary is required to act ``solely in the interest of the 
participants . . . with the care, skill, prudence, and diligence under 
the circumstances then prevailing that a prudent man acting in a like 
capacity and familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims.'' Similarly, both 
ERISA section 404(a)(1)(A) and the trust-law duty of loyalty require 
fiduciaries to put the interests of trust beneficiaries first, without 
regard to the fiduciaries' own self-interest. Under this standard, for 
example, a fiduciary, in choosing between two investments, could not 
select an investment because it is better for the fiduciary's bottom 
line, even though it is a worse choice for the plan or IRA.\32\
---------------------------------------------------------------------------

    \32\ The standard does not prevent investment advice fiduciaries 
from restricting their recommended investments to proprietary 
products or products that generate revenue sharing. Section IV of 
the Best Interest Contract Exemption specifically addresses how the 
standard may be satisfied under such circumstances.
---------------------------------------------------------------------------

    A wide range of commenters indicated support for a broad ``best 
interest'' standard. Some comments indicated that the best interest 
standard is consistent with the way advisers provide investment advice 
to clients today. However, a number of these commenters expressed 
misgivings as to the definition used in the proposed amendments, in 
particular, the ``without regard to'' formulation. The commenters 
indicated uncertainty as to the meaning of the phrase, including: 
Whether it permitted the fiduciary to be paid; and whether it permitted 
investment advice on proprietary products. One commenter was especially 
concerned that the amendments might restrict fiduciaries' ability to 
sell proprietary products, which are specifically permitted in PTE 77-
4.
    Other commenters asked the Department to use a different definition 
of ``Best Interest'' or simply use the exact language from ERISA's 
section 404 duty of loyalty. Others suggested definitional approaches 
that would require that the fiduciary ``not subordinate'' its 
customers' interests to its own interests, or that the fiduciary put 
its customers' interests ahead of its own interests, or similar 
constructs.\33\
---------------------------------------------------------------------------

    \33\ The alternative approaches are discussed in greater detail 
in the preamble to the Best Interest Contract Exemption, adopted 
elsewhere in today's issue of the Federal Register.
---------------------------------------------------------------------------

    The Financial Industry Regulatory Authority (FINRA) \34\ suggested 
that the federal securities laws should form the foundation of the Best 
Interest standard. Specifically, FINRA urged that the Best Interest 
definition in the exemptions incorporate the ``suitability'' standard 
applicable to investment advisers and broker dealers under federal 
securities laws. According to FINRA, this would facilitate customer 
enforcement of the Best Interest standard by providing adjudicators 
with a well-established basis on which to find a violation.
---------------------------------------------------------------------------

    \34\ FINRA is registered with the Securities and Exchange 
Commission (SEC) as a national securities association and is a self-
regulatory organization, as those terms are defined in the Exchange 
Act, which operates under SEC oversight.
---------------------------------------------------------------------------

    Other commenters found the Best Interest standard to be an 
appropriate statement of the obligations of a fiduciary investment 
advice provider and believed it would provide concrete protections 
against conflicted recommendations. These commenters asked the 
Department to maintain the Best Interest definition as proposed. One 
commenter wrote that the term ``best interest'' is commonly and used in 
connection with a fiduciary's duty of loyalty and cautioned the 
Department against creating exemptions that failed to include the duty 
of loyalty. Others urged the Department to avoid definitional changes 
that would reduce current protections to plans and IRAs. Some 
commenters also noted that the ``without regard to'' language is 
consistent with the recommended standard in the SEC staff Dodd-Frank 
Study, and suggested that it had the added benefit of potentially 
harmonizing with a future securities law standard for broker-dealers.
    The final amendments retain the Best Interest definition as 
proposed, with minor adjustments. The first prong of the standard was 
revised in each amended exemption to more closely track the statutory 
language of ERISA section 404(a), and, is consistent with the 
Department's intent to hold investment advice fiduciaries to a prudent 
investment professional standard. Accordingly, the definition of Best 
Interest now requires advice that ``reflects the care, skill, prudence, 
and diligence under the circumstances then prevailing that a prudent 
person acting in a like capacity and familiar with such matters would 
use in the conduct of an enterprise of a like character and with like 
aims, based on the investment objectives, risk tolerance, financial 
circumstances, and needs of the plan or IRA . . .'' The exemptions 
adopt the second prong of the proposed definition, ``without regard to 
the financial or other interests of the fiduciary, any affiliate or 
other party,'' without change. The Department continues to believe that 
the ``without regard to'' language sets forth the appropriate, 
protective standard under which a fiduciary investment adviser should 
act. Many of the alternative approaches suggested by commenters pose 
their own ambiguities and interpretive challenges, and lower standards 
run the risk of undermining this regulatory initiative's goal of 
reducing the impact of conflicts of interest on plans and IRAs.
    The Department has not specifically incorporated the suitability 
obligation as an element of the Best Interest standard, as suggested by 
FINRA but many aspects of suitability are also elements of the Best 
Interest standard. An investment recommendation that is not suitable 
under the securities laws would not meet the Best Interest standard. 
Under FINRA's rule 2111(a) on suitability, broker-dealers ``must have a 
reasonable basis to believe that a recommended transaction or 
investment strategy involving a security or securities is suitable for 
the customer.'' The text of rule 2111(a), however, does not do any of 
the following: Reference a best interest standard, clearly require 
brokers to put their client's interests ahead of their own, expressly 
prohibit the selection of the least suitable (but more remunerative) of 
available investments, or require them to take the kind of measures to 
avoid or mitigate conflicts of interests that are required as 
conditions of these amended exemptions.
    The Department recognizes that FINRA issued guidance on rule 2111 
in which it explains that ``in interpreting the suitability rule, 
numerous cases explicitly state that a broker's recommendations must be 
consistent with his customers' best interests,'' and provided examples 
of conduct that would be prohibited under this standard, including 
conduct that these amended exemptions would not allow.\35\ The guidance 
goes on to state

[[Page 21216]]

that ``[t]he suitability requirement that a broker make only those 
recommendations that are consistent with the customer's best interests 
prohibits a broker from placing his or her interests ahead of the 
customer's interests.'' The Department, however is reluctant to adopt 
as an express standard such guidance, which has not been formalized as 
a clear rule and that may be subject to change. Additionally, FINRA's 
suitability rule may be subject to interpretations which could conflict 
with interpretations by the Department, and the cases cited in the 
FINRA guidance, as read by the Department, involved egregious fact 
patterns that one would have thought violated the suitability standard, 
even without reference to the customer's ``best interest.''
---------------------------------------------------------------------------

    \35\ FINRA Regulatory Notice 12-25, p. 3 (2012).
---------------------------------------------------------------------------

    Accordingly, after review of the issue, the Department has decided 
not to accept the comment. The Department has concluded that its 
articulation of a clear loyalty standard within the exemption, rather 
than by reference to the FINRA guidance, will provide clarity and 
certainty to investors and better protect their interests.
    The Best Interest standard, as set forth in the exemptions, is 
intended to effectively incorporate the objective standards of care and 
undivided loyalty that have been applied under ERISA for more than 
forty years. Under these objective standards, the fiduciary must adhere 
to a professional standard of care in making investments or investment 
recommendations that are in the plan's or IRA's Best Interest. The 
fiduciary may not base his or her discretionary acquisitions or 
recommendations on the fiduciary's own financial interest in the 
transaction. Nor may the fiduciary acquire or recommend the investment 
unless it meets the objective prudent person standard of care. 
Additionally, the duties of loyalty and prudence embodied in ERISA are 
objective obligations that do not require proof of fraud or 
misrepresentation, and full disclosure is not a defense to making 
imprudent acquisitions or recommendations or favoring one's own 
interests at the plan's or IRA's expense.
    Several commenters requested additional guidance on the Best 
Interest standard. Fiduciaries that are concerned about satisfying the 
standard may wish to consult the policies and procedures requirement in 
Section II(d) of the Best Interest Contract Exemption. While these 
policies and procedures are not a condition of these amended 
exemptions, they may provide useful guidance for financial institutions 
wishing to ensure that individual advisers adhere to the Impartial 
Conduct Standards. The preamble to the Best Interest Contract Exemption 
provides examples of policies and procedures prudently designed to 
ensure that advisers adhere to the Impartial Conduct Standards. The 
examples are not intended to be exhaustive or mutually exclusive, and 
range from examples that focus on eliminating or nearly eliminating 
compensation differentials to examples that permit, but police, the 
differentials.
    A few commenters also questioned the requirement in the Best 
Interest standard that recommendations be made without regard to the 
interests of the fiduciary, any affiliate or ``other party.'' The 
commenters indicated they did not know the purpose of the reference to 
``other parties'' and asked that it be deleted. The Department intends 
the reference to make clear that a fiduciary operating within the 
Impartial Conduct Standards should not take into account the interests 
of any party other than the plan or IRA--whether the other party is 
related to the fiduciary or not. For example, an entity that may be 
unrelated to the fiduciary but could still constitute an ``other 
party,'' for these purposes, is the manufacturer of the investment 
product being acquired or recommended.
    Other commenters asked for confirmation that the Best Interest 
standard is applied based on the facts and circumstances as they 
existed at the time of the fiduciary's action, and not based on 
hindsight. Consistent with the well-established legal principles that 
exist under ERISA today, the Department confirms that the Best Interest 
standard is not a hindsight standard, but rather is based on the facts 
as they existed at the time of the transaction. Thus, the courts have 
evaluated the prudence of a fiduciary's actions under ERISA by focusing 
on the process the fiduciary used to reach its determination or 
recommendation--whether the fiduciary, ``at the time they engaged in 
the challenged transactions, employed the proper procedures to 
investigate the merits of the investment and to structure the 
investment.'' \36\ The standard does not measure compliance by 
reference to how investments subsequently performed or turn fiduciaries 
into guarantors of investment performance, even though they gave advice 
that was prudent and loyal at the time of transaction.\37\
---------------------------------------------------------------------------

    \36\ Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983).
    \37\ One commenter requested an adjustment to the ``prudence'' 
component of the Best Interest standard, under which the standard 
would be that of a ``prudent person serving clients with similar 
retirement needs and offering a similar array of products.'' In this 
way, the commenter sought to accommodate varying perspectives and 
opinions on particular investment products and business practices. 
The Department disagrees with the comment, which could be read as 
qualifying the stringency of the prudence obligation based on the 
fiduciary's independent decisions on which products to offer, rather 
than on the needs of the particular retirement investor. Therefore, 
the Department did not adopt this suggestion.
---------------------------------------------------------------------------

    This is not to suggest that the ERISA section 404 prudence standard 
or Best Interest standard, are solely procedural standards. Thus, the 
prudence standard, as incorporated in the Best Interest standard, is an 
objective standard of care that requires investment advice fiduciaries 
to investigate and evaluate investments, make recommendations, and 
exercise sound judgment in the same way that knowledgeable and 
impartial professionals would. ``[T]his is not a search for subjective 
good faith--a pure heart and an empty head are not enough.'' \38\ 
Whether or not the fiduciary is actually familiar with the sound 
investment principles necessary to make particular recommendations, the 
fiduciary must adhere to an objective professional standard. 
Additionally, fiduciaries are held to a particularly stringent standard 
of prudence when they have a conflict of interest.\39\ For this reason, 
the Department declines to provide a safe harbor based on ``procedural 
prudence'' as requested by a commenter.
---------------------------------------------------------------------------

    \38\ Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983), 
cert. denied, 467 U.S. 1251 (1984); see also DiFelice v. U.S. 
Airways, Inc., 497 F.3d 410, 418 (4th Cir. 2007) (``Good faith does 
not provide a defense to a claim of a breach of these fiduciary 
duties; `a pure heart and an empty head are not enough.' '').
    \39\ Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982) 
(``the[ ] decisions [of the fiduciary] must be made with an eye 
single to the interests of the participants and beneficiaries''); 
see also Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 298 (5th Cir. 
2000); Leigh v. Engle, 727 F.2d 113, 126 (7th Cir. 1984).
---------------------------------------------------------------------------

    The Department additionally confirms its intent that the phrase 
``without regard to'' be given the same meaning as the language in 
ERISA section 404 that requires a fiduciary to act ``solely in the 
interest of'' participants and beneficiaries, as such standard has been 
interpreted by the Department and the courts. Therefore, the standard 
would not, as some commenters suggested, foreclose the fiduciary from 
being paid. In response to concerns about the satisfaction of the 
standard in the context of proprietary product recommendations or 
investment menus limited to proprietary products and/or investments 
that generate third party payments, the Department has revised Section 
IV of the Best Interest Contract Exemption to provide additional 
clarity and specific guidance on this issue.
    In response to commenter concerns, the Department also confirms 
that the

[[Page 21217]]

Best Interest standard does not impose an unattainable obligation on 
fiduciaries to somehow identify the single ``best'' investment for the 
plan or IRA out of all the investments in the national or international 
marketplace, assuming such advice were even possible. Instead, as 
discussed above, the Best Interest standard set out in the exemptions 
incorporates two fundamental and well-established fiduciary 
obligations: The duties of prudence and loyalty. Thus, the fiduciary's 
obligation under the Best Interest standard is to act in accordance 
with the professional standards of prudence, and to put the plan's or 
IRA's financial interests in the driver's seat, rather than the 
competing interests of the fiduciary or other parties.
    Finally, in response to questions regarding the extent to which 
this Best Interest standard or other provisions of the amendments 
impose an ongoing monitoring obligation on fiduciaries, the text does 
not impose a monitoring requirement, but instead leaves that to the 
parties. This is consistent with the Department's interpretation of an 
investment advice fiduciary's monitoring responsibility as articulated 
in the preamble to the Regulation.

2. Reasonable Compensation

    The Impartial Conduct Standards also include the reasonable 
compensation standard. Under this standard, compensation received by 
the fiduciary and its affiliates in connection with the applicable 
transaction may not exceed compensation for services that is reasonable 
within the meaning of ERISA section 408(b)(2) and Code section 
4975(d)(2).
    The obligation to pay no more than reasonable compensation to 
service providers is long recognized under ERISA and the Code. ERISA 
section 408(b)(2) and Code section 4975(d)(2), require that services 
arrangements involving plans and IRAs result in no more than reasonable 
compensation to the service provider. Accordingly fiduciaries--as 
service providers--have long been subject to this requirement, 
regardless of their fiduciary status. At bottom, the standard simply 
requires that compensation not be excessive, as measured by the market 
value of the particular services, rights, and benefits the fiduciary is 
delivering to the plan or IRA. Given the conflicts of interest 
associated with the commissions and other payments covered by the 
exemptions, and the potential for self-dealing, it is particularly 
important that fiduciaries adhere to these statutory standards, which 
are rooted in common law principles.\40\
---------------------------------------------------------------------------

    \40\ See generally Restatement (Third) of Trusts section 38 
(2003).
---------------------------------------------------------------------------

    Several commenters supported this standard. The requirement that 
compensation be limited to what is reasonable is an important 
protection of the exemptions and a well-established standard, they 
said. A number of other commenters requested greater specificity as to 
the meaning of the reasonable compensation standard. As proposed, the 
standard stated that all compensation received by the fiduciary and its 
affiliates in connection with the transaction must be reasonable in 
relation to the total services the fiduciary and its affiliates provide 
to the plan or IRA. Some commenters stated that the proposed reasonable 
compensation standard was too vague. Because the language of the 
proposal did not reference ERISA section 408(b)(2) and Code section 
4975(d)(2), commenters asked whether the standard differed from those 
statutory provisions. In particular, some commenters questioned the 
meaning of the proposed language ``in relation to the total services 
the fiduciary provides to the plan or IRA.'' The commenters indicated 
that the proposal did not adequately explain this formulation of the 
reasonable compensation standard.
    There was concern that the standard could be applied retroactively 
rather than based on the parties' reasonable beliefs as to the 
reasonableness of the compensation at the time of the recommendation. 
Commenters also indicated uncertainty as to how to comply with the 
condition and asked whether it would be necessary to survey the market 
to determine market rates. Some commenters requested that the 
Department include the words ``and customary'' in the reasonable 
compensation definition, to specifically permit existing compensation 
arrangements. One commenter raised the concern that the reasonable 
compensation determination raised antitrust concerns because it would 
require investment advice fiduciaries to agree upon a market rate and 
result in anti-competitive behavior.
    Commenters also asked the Department to provide examples of 
scenarios that met the reasonable compensation standard and safe 
harbors and others requested examples of scenarios that would fail to 
meet these standards. FINRA and other commenters suggested that the 
Department incorporate existing FINRA rules 2121 and 2122, and NASD 
rule 2830 regarding the reasonableness of compensation for broker-
dealers.\41\
---------------------------------------------------------------------------

    \41\ FINRA's comment letter described NASD rule 2830 as imposing 
specific caps on compensation with respect to investment company 
securities that broker-dealers may sell. While the Department views 
this cap as an important protection of investors, it establishes an 
outside limit rather than a standard of reasonable compensation.
---------------------------------------------------------------------------

    Commenters also asked how the standard would be satisfied for 
proprietary products. One commenter indicated that the calculation 
should not include affiliates' or related entities' compensation as 
this would appear to put them at a comparative disadvantage.
    Finally, a few commenters took the position that the reasonable 
compensation determination should not be a requirement of an exemption. 
In their view, a plan fiduciary that is not providing investment advice 
or exercising investment discretion should decide the reasonableness of 
the compensation paid to the one who is. Another commenter suggested 
that if an independent plan fiduciary sets the menu of investment 
options this should be sufficient to comply with the reasonable 
compensation standard.
    In response to comments on this requirement, the Department has 
retained the reasonable compensation standard as a condition of the 
amended exemptions. As noted above, the ``reasonable compensation'' 
obligation is a feature of ERISA and the Code under current law that 
has long applied to financial services providers, whether fiduciaries 
or not. The standard is also applicable to fiduciaries under the common 
law of agency and trusts. It is particularly important that fiduciaries 
adhere to these standards when engaging in the transactions covered 
under these amended exemptions, so as to avoid exposing plans and IRAs 
to harms associated with conflicts of interest.
    Although some commenters suggested that the reasonable compensation 
determination be made by another plan fiduciary, the exemptions (like 
the statutory obligation) obligate fiduciaries to avoid overcharging 
their plan and IRA customers, despite the conflicts of interest 
associated with their compensation. Fiduciaries and other services 
providers may not charge more than reasonable compensation regardless 
of whether another fiduciary has signed off on the compensation. 
Nothing in the exemptions, however, precludes fiduciaries from seeking 
impartial review of their fee structures to safeguard against abuse, 
and they may well want to include such reviews in their policies and 
procedures.

[[Page 21218]]

    Further, the Department disagrees that the requirement is 
inconsistent with antitrust laws. Nothing in the exemption contemplates 
or requires that Advisers or Financial Institutions agree upon a price 
with their competitors. The focus of the reasonable compensation 
condition is on preventing overcharges to retirement investors, not 
promoting anti-competitive practices. Indeed, if Advisors and Financial 
Institutions consulted with competitors to set prices, the agreed-upon 
prices could well violate the condition.
    In response to comments, however, the operative text of the final 
amendments was clarified to provide that, to the extent it applies to 
services, the reasonable compensation standard is the same as the well-
established requirement set forth in ERISA section 408(b)(2) and Code 
section 4975(d)(2), and the regulations thereunder. The reasonableness 
of the fees depends on the particular facts and circumstances at the 
time of the recommendation. Several factors inform whether compensation 
is reasonable including, inter alia, the market pricing of service(s) 
provided and the underlying asset(s), the scope of monitoring, and the 
complexity of the product. No single factor is dispositive in 
determining whether compensation is reasonable; the essential question 
is whether the charges are reasonable in relation to what the investor 
receives. Consistent with the Department's prior interpretations of 
this standard, the Department confirms that a fiduciary does not have 
to recommend the transaction that is the lowest cost or that generates 
the lowest fees without regard to other relevant factors. In this 
regard, the Department declines to specifically reference FINRA's 
standard in the exemptions, but rather relies on ERISA's own 
longstanding reasonable compensation formulation.
    In response to concerns about application of the standard to 
investment products that bundle together services and investment 
guarantees or other benefits, the Department responds that the 
reasonable compensation condition is intended to apply to the 
compensation received by the Financial Institution, Adviser, 
Affiliates, and Related Entities in same manner as the reasonable 
compensation condition set forth in ERISA section 408(b)(2) and Code 
section 4975(d)(2). Accordingly, the exemption's reasonable 
compensation standard covers compensation received directly from the 
plan or IRA and indirect compensation received from any source other 
than the plan or IRA in connection with the recommended 
transaction.\42\ When assessing the reasonableness of a charge, one 
generally needs to consider the value of all the services and benefits 
provided for the charge, not just some. If parties need additional 
guidance in this respect, they should refer to the Department's 
interpretations under ERISA section 408(b)(2) and Code section 
4975(d)(2) and the Department will provide additional guidance if 
necessary.
---------------------------------------------------------------------------

    \42\ Such compensation includes, for example charges against the 
investment, such as commissions, sales loads, sales charges, 
redemption fees, surrender charges, exchange fees, account fees and 
purchase fees, as well as compensation included in operating 
expenses and other ongoing charges, such as wrap fees.
---------------------------------------------------------------------------

    A commenter urged the Department to provide that compensation 
received by an Affiliate would not have to be considered in applying 
the reasonable compensation standard. According to the commenter, 
including such compensation in the assessment of reasonable 
compensation would place proprietary products at a disadvantage. The 
Department disagrees with the proposition that a proprietary product 
would be disadvantaged merely because more of the compensation goes to 
affiliated parties than in the case of competing products, which 
allocate more of the compensation to non-affiliated parties. The 
availability of the exemptions, however, does not turn on how 
compensation is allocated between affiliates and non-affiliates. 
Certainly, the Department would not expect that a proprietary product 
would be at a disadvantage in the marketplace because it carefully 
ensures that the associated compensation is reasonable. Assuming the 
Best Interest standard is satisfied and the compensation is reasonable, 
the exemption should not impede the recommendation of proprietary 
products. Accordingly, the Department disagrees with the commenter. The 
Department declines suggestions to provide specific examples of 
``reasonable'' amounts or specific safe harbors. Ultimately, the 
``reasonable compensation'' standard is a market based standard. As 
noted above, the standard incorporates the familiar ERISA section 
408(b)(2) and Code section 4975(d)(2) standards The Department is 
unwilling to condone all ``customary'' compensation arrangements and 
declines to adopt a standard that turns on whether the agreement is 
``customary.'' For example, it may in some instances be ``customary'' 
to charge customers fees that are not transparent or that bear little 
relationship to the value of the services actually rendered, but that 
does not make the charges reasonable. Finally, the Department notes 
that all recommendations are subject to the overarching Best Interest 
standard, which incorporates the fundamental fiduciary obligations of 
prudence and loyalty. An imprudent recommendation for an investor to 
overpay for an investment transaction would violate that standard, 
regardless of whether the overpayment was attributable to compensation 
for services, a charge for benefits or guarantees, or something else.

3. Misleading Statements

    The final Impartial Conduct Standard requires that statements by 
the fiduciaries to the plans and IRAs about the recommended 
transaction, fees and compensation, material conflicts of interest, and 
any other matters relevant to a plan's or IRA owner's investment 
decisions, may not be materially misleading at the time they are made.
    In response to commenters, the Department added a materiality 
standard to the definition of material conflict of interest and 
adjusted the text to clarify that the standard is measured at the time 
of the representations, i.e., the statements must not be misleading 
``at the time they are made.''
    A number of commenters focused on the definition of material 
conflict of interest used in the proposals. As proposed, a material 
conflict of interest would have existed when a fiduciary ``has a 
financial interest that could affect the exercise of its best judgment 
as a fiduciary in rendering advice to a plan or IRA owner.'' Some 
commenters took the position that the proposal did not adequately 
explain the term ``material'' or incorporate a ``materiality'' standard 
into the definition.
    However, another commenter indicated that the Department should not 
use the term ``material'' in the definition of conflict of interest. 
The commenter believed that it could result in a standard that was too 
subjective from the perspective of the fiduciary relying on the 
exemption, and could undermine the protectiveness of the exemption.
    After consideration of the comments, the Department adjusted the 
definition of material conflict of interest to provide that a material 
conflict of interest exists when the fiduciary has a ``financial 
interest that a reasonable person would conclude could affect the 
exercise of its best judgment as a fiduciary in rendering advice to a 
plan or IRA owner.'' This language responds to concerns about the 
breadth and potential subjectivity of the standard.

[[Page 21219]]

    The Department did not accept certain other comments. One commenter 
requested that the standard indicate that the statements must have been 
reasonably relied on by the plan or IRA. The Department rejected the 
comment. The Department's aim is to ensure that fiduciaries uniformly 
adhere to the Impartial Conduct Standards, including the obligation to 
avoid materially misleading statements, when they exercise discretion 
or provide investment advice to plans and IRAs.
    One commenter asked the Department to require only that the 
fiduciary ``reasonably believe'' the statements are not misleading. The 
Department is concerned that this standard could undermine the 
protections of this condition, by requiring plans and IRAs to prove the 
fiduciary's actual belief rather than focusing on whether the statement 
is objectively misleading. However, to address commenters' concerns 
about the risks of engaging in a prohibited transaction, as noted 
above, the Department has clarified that the standard is measured at 
the time of the representations and has added a materiality standard.
    The Department believes that plans and IRAs are best served by 
statements and representations that are free from material 
misstatements. Fiduciaries best avoid liability--and best promote the 
interests of the plans and IRAs--by ensuring that accurate 
communications are a consistent standard in all their interactions with 
their customers.
    A commenter suggested that the Department adopt FINRA's 
``Frequently Asked Questions regarding Rule 2210'' in this 
connection.\43\ FINRA's rule 2210, Communications with the Public, sets 
forth a number of procedural rules and standards that are designed to, 
among other things, prevent broker-dealer communications from being 
misleading. The Department agrees that adherence to FINRA's standards 
can promote materially accurate communications, and certainly believes 
that fiduciaries should pay careful attention to such guidance 
documents. After review of the rule and FAQs, however, the Department 
declines to simply adopt FINRA's guidance, which addresses written 
communications, since the condition of the exemptions is broader in 
this respect. In the Department's view, the meaning of the standard is 
clear, and is already part of a plan fiduciary's obligations under 
ERISA. If, however, issues arise in implementation of the exemptions, 
the Department will consider requests for additional guidance.
---------------------------------------------------------------------------

    \43\ Currently available at https://www.finra.org/industry/finra-rule-2210-questions-and-answers.
---------------------------------------------------------------------------

Failure to Disclose
    Commenters expressed concern about the statement in the third 
Impartial Conduct Standard that ``failure to disclose a material 
conflict of interest . . . is deemed to be a misleading statement.'' 
The commenters indicated that, without a materiality standard, this 
language would result in an overly broad and uncertain disclosure 
requirement. The requirement would be especially burdensome in light of 
the potential consequences of engaging in a non-exempt prohibited 
transaction, including rescission, repayment of lost earnings, excise 
tax, and personal liability, commenters said. One commenter stated that 
this was effectively a change to the existing disclosure requirements 
of the exemptions, particularly PTE 77-4.
    The Department has considered these comments. As noted above, the 
amended exemptions include a materiality standard in the definition of 
material conflict of interest. Nevertheless, the Department was 
persuaded by commenters to eliminate the statement from the third 
Impartial Conduct Standard. When viewed as a whole, the Department 
believes the conditions already existing in these exemptions, with the 
addition of the Impartial Conduct Standards adopted in these final 
amendments, provide sufficient protections to retirement investors 
without this additional disclosure provision.

4. PTE 77-4

    The Department received some comments specific to PTE 77-4 that 
were generally outside the scope of these amendments. A few commenters 
requested that PTE 77-4 be amended to permit fiduciaries to rely on 
negative consent under the exemption. Another commenter requested 
amendments or interpretations relating to the extent of relief provided 
by the exemption. For example, one commenter requested that the 
Department clarify that the prospectus delivery requirement found at 
PTE 77-4 section II(d) may be satisfied by identifying a Web site 
address where investment materials can be obtained. This commenter also 
requested that PTE 77-4 be expanded to include investments in 
commingled trusts and exchange-traded funds.
    Regardless of possible merit, these requests raise issues outside 
the scope of these amendments. The amendments were focused on the 
implementation of the Impartial Conduct Standards with respect to these 
existing class exemptions, and were not intended to address other 
issues with respect to these exemptions. The issues raised in these 
comments were not proposed and commenters did not have the opportunity 
to address them. Therefore, the comments were not accepted at this 
time. Parties wishing to pursue these comments may seek an advisory 
opinion or an amendment to PTE 77-4 from the Department.

Applicability Date

    The Regulation will become effective June 7, 2016 and these amended 
exemptions are issued on that same date. The Regulation is effective at 
the earliest possible effective date under the Congressional Review 
Act. For the exemptions, the issuance date serves as the date on which 
the amended exemptions are intended to take effect for purposes of the 
Congressional Review Act. This date was selected in order to provide 
certainty to plans, plan fiduciaries, plan participants and 
beneficiaries, IRAs, and IRA owners that the new protections afforded 
by the Regulation are officially part of the law and regulations 
governing their investment advice providers, and to inform financial 
services providers and other affected service providers that the 
Regulation and amended exemptions are final and not subject to further 
amendment or modification without additional public notice and comment. 
The Department expects that this effective date will remove uncertainty 
as an obstacle to regulated firms allocating capital and other 
resources toward transition and longer term compliance adjustments to 
systems and business practices.
    The Department has also determined that, in light of the importance 
of the Regulation's consumer protections and the significance of the 
continuing monetary harm to retirement investors without the rule's 
changes, that an Applicability Date of April 10, 2017, is appropriate 
for plans and their affected financial services and other service 
providers to adjust to the basic change from non-fiduciary to fiduciary 
status. The amendments as finalized herein have the same Applicability 
Date; parties may therefore rely on the amended exemptions beginning on 
the Applicability Date.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve 
a fiduciary or other party in interest or disqualified

[[Page 21220]]

person with respect to a plan from certain other provisions of ERISA 
and the Code, including any prohibited transaction provisions to which 
the exemption does not apply and the general fiduciary responsibility 
provisions of ERISA section 404 which require, among other things, that 
a fiduciary discharge his or her duties respecting the plan solely in 
the interests of the plan's participants and beneficiaries and in a 
prudent fashion in accordance with ERISA section 404(a)(1)(B);
    (2) The Department finds that the amended exemptions are 
administratively feasible, in the interests of plans and their 
participants and beneficiaries and IRA owners, and protective of the 
rights of plans' participants and beneficiaries and IRA owners;
    (3) The amended exemptions are applicable to a particular 
transaction only if the transactions satisfy the conditions specified 
in the amendments;
    (4) The amended exemptions are supplemental to, and not in 
derogation of, any other provisions of ERISA and the Code, including 
statutory or administrative exemptions and transitional rules. 
Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Amendments to Class Exemptions

I. Prohibited Transaction Exemption 75-1, Part III

    The Department amends Prohibited Transaction Exemption 75-1, Part 
III, under the authority of ERISA section 408(a) and Code section 
4975(c)(2), and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (76 FR 66637, October 27, 2011).
    A. A new section III(f) is inserted to read as follows:
    (f) Standards of Impartial Conduct. If the fiduciary is a fiduciary 
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code 
section 4975(e)(3)(A) or (B) with respect to the assets of a plan or 
IRA involved in the transaction, the fiduciary must comply with the 
following conditions with respect to the transaction:
    (1) The fiduciary acts in the Best Interest of the plan or IRA at 
the time of the transaction.
    (2) All compensation received by the fiduciary in connection with 
the transaction neither exceeds compensation for services that is 
reasonable within the meaning of ERISA section 408(b)(2) and Code 
section 4975(d)(2).
    (3) The fiduciary's statements about recommended investments, fees 
and compensation, material conflicts of interest, and any other matters 
relevant to the plan's or IRA owner's investment decisions, are not 
materially misleading at the time they are made. A ``material conflict 
of interest'' exists when a fiduciary has a financial interest that a 
reasonable person would conclude could affect the exercise of its best 
judgment as a fiduciary in rendering advice to the plan or IRA owner.
    For purposes of this section, a fiduciary acts in the ``Best 
Interest'' of the plan or IRA when the fiduciary acts with the care, 
skill, prudence, and diligence under the circumstances then prevailing 
that a prudent person acting in a like capacity and familiar with such 
matters would use in the conduct of an enterprise of a like character 
and with like aims, based on the investment objectives, risk tolerance, 
financial circumstances, and needs of the plan or IRA, without regard 
to the financial or other interests of the fiduciary or any other 
party. Also for the purposes of this section, the term IRA means any 
account or annuity described in Code section 4975(e)(1)(B) through (F), 
including, for example, an individual retirement account described in 
section 408(a) of the Code and a health savings account described in 
section 223(d) of the Code.
    B. Sections III(f) and III(g) are redesignated, respectively, as 
sections III(g) and III(h).

II. Prohibited Transaction Exemption 75-1, Part IV

    The Department amends Prohibited Transaction Exemption 75-1, Part 
IV, under the authority of ERISA section 408(a) and Code section 
4975(c)(2), and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (76 FR 66637, October 27, 2011).
    A. A new section IV(e) is inserted to read as follows:
    (e) Standards of Impartial Conduct. If the fiduciary is a fiduciary 
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code 
section 4975(e)(3)(A) or (B) with respect to the assets of the plan or 
IRA involved in the transaction, the fiduciary must comply with the 
following conditions with respect to the transaction:
    (1) The fiduciary acts in the Best Interest of the plan or IRA at 
the time of the transaction.
    (2) All compensation received by the fiduciary in connection with 
the transaction neither exceeds compensation for services that is 
reasonable within the meaning of ERISA section 408(b)(2) and Code 
section 4975(d)(2).
    (3) The fiduciary's statements about recommended investments, fees 
and compensation, material conflicts of interest, and any other matters 
relevant to the plan's or IRA owner's investment decisions, are not 
materially misleading at the time they are made. A ``material conflict 
of interest'' exists when a fiduciary has a financial interest that a 
reasonable person would conclude could affect the exercise of its best 
judgment as a fiduciary in rendering advice to the plan or IRA owner.
    For purposes of this section, a fiduciary acts in the ``Best 
Interest'' of the plan or IRA when the fiduciary acts with the care, 
skill, prudence, and diligence under the circumstances then prevailing 
that a prudent person acting in a like capacity and familiar with such 
matters would use in the conduct of an enterprise of a like character 
and with like aims, based on the investment objectives, risk tolerance, 
financial circumstances, and needs of the plan or IRA, without regard 
to the financial or other interests of the fiduciary or any other 
party. Also for the purposes of this section, the term IRA means any 
account or annuity described in Code section 4975(e)(1)(B) through (F), 
including, for example, an individual retirement account described in 
section 408(a) of the Code and a health savings account described in 
section 223(d) of the Code.
    B. Sections IV(e) and IV(f) are redesignated, respectively, as 
sections IV(f) and IV(g).

III. Prohibited Transaction Exemption 77-4

    The Department amends Prohibited Transaction Exemption 77-4 under 
the authority of ERISA section 408(a) and Code section 4975(c)(2), and 
in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (76 FR 66637, October 27, 2011).
    A new section II(g) is inserted to read as follows:
    (g) Standards of Impartial Conduct. If the fiduciary is a fiduciary 
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code 
section 4975(e)(3)(A) or (B) with respect to the assets of the plan or 
IRA involved in the transaction, the fiduciary must comply with the 
following conditions with respect to the transaction:
    (1) The fiduciary acts in the Best Interest of the plan or IRA at 
the time of the transaction.
    (2) All compensation received by the fiduciary and its affiliates 
in connection with the transaction neither exceeds

[[Page 21221]]

compensation for services that is reasonable within the meaning of 
ERISA section 408(b)(2) and Code section 4975(d)(2).
    (3) The fiduciary's statements about recommended investments, fees 
and compensation, material conflicts of interest, and any other matters 
relevant to the plan's or IRA owner's investment decisions, are not 
materially misleading at the time they are made. A ``material conflict 
of interest'' exists when a fiduciary has a financial interest that a 
reasonable person would conclude could affect the exercise of its best 
judgment as a fiduciary in rendering advice to the plan or IRA owner.
    For purposes of this section, a fiduciary acts in the ``Best 
Interest'' of the plan or IRA when the fiduciary acts with the care, 
skill, prudence, and diligence under the circumstances then prevailing 
that a prudent person acting in a like capacity and familiar with such 
matters would use in the conduct of an enterprise of a like character 
and with like aims, based on the investment objectives, risk tolerance, 
financial circumstances, and needs of the plan or IRA, without regard 
to the financial or other interests of the fiduciary, any affiliate or 
other party. Also for the purposes of this section, the term IRA means 
any account or annuity described in Code section 4975(e)(1)(B) through 
(F), including, for example, an individual retirement account described 
in section 408(a) of the Code and a health savings account described in 
section 223(d) of the Code.

IV. Prohibited Transaction Exemption 80-83

    The Department amends Prohibited Transaction Exemption 80-83 under 
the authority of ERISA section 408(a) and Code section 4975(c)(2), and 
in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (76 FR 66637, October 27, 2011).
    A. A new section II(A)(2) is inserted to read as follows:
    (2) Standards of Impartial Conduct. If the fiduciary is a fiduciary 
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code 
section 4975(e)(3)(A) or (B) with respect to the assets of the plan or 
IRA involved in the transaction, the fiduciary must comply with the 
following conditions with respect to the transaction:
    (a) The fiduciary acts in the Best Interest of the plan or IRA at 
the time of the transaction.
    (b) All compensation received by the fiduciary and its affiliates 
in connection with the transaction neither exceeds compensation for 
services that is reasonable within the meaning of ERISA section 
408(b)(2) and Code section 4975(d)(2).
    (c) The fiduciary's statements about recommended investments, fees 
and compensation, material conflicts of interest, and any other matters 
relevant to the plan's or IRA owner's investment decisions, are not 
materially misleading at the time they are made. A ``material conflict 
of interest'' exists when a fiduciary has a financial interest that a 
reasonable person would conclude could affect the exercise of its best 
judgment as a fiduciary in rendering advice to the plan or IRA owner.
    For purposes of this section, a fiduciary acts in the ``Best 
Interest'' of the employee benefit plan or IRA when the fiduciary acts 
with the care, skill, prudence, and diligence under the circumstances 
then prevailing that a prudent person acting in a like capacity and 
familiar with such matters would use in the conduct of an enterprise of 
a like character and with like aims, based on the investment 
objectives, risk tolerance, financial circumstances, and needs of the 
employee benefit plan or IRA, without regard to the financial or other 
interests of the fiduciary, any affiliate or other party. Also for the 
purposes of this section, the term IRA means any account or annuity 
described in Code section 4975(e)(1)(B) through (F), including, for 
example, an individual retirement account described in section 408(a) 
of the Code and a health savings account described in section 223(d) of 
the Code.
    B. Section II(A)(2) is redesignated as section II(A)(3).

V. Prohibited Transaction Exemption 83-1

    The Department amends Prohibited Transaction Exemption 83-1 under 
the authority of ERISA section 408(a) and Code section 4975(c)(2), and 
in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (76 FR 66637, October 27, 2011).
    A. A new section II(B) is inserted to read as follows:
    (B) Standards of Impartial Conduct. Solely with respect to the 
relief provided under section I(B), if the sponsor, trustee or insurer 
of such pool who is a fiduciary is a fiduciary within the meaning of 
section 3(21)(A)(i) or (ii) of the Act, or Code section 4975(e)(3)(A) 
or (B) with respect to the assets of the plan or IRA involved in the 
transaction, the fiduciary must comply with the following conditions 
with respect to the transaction:
    (1) The fiduciary acts in the Best Interest of the plan or IRA at 
the time of the transaction.
    (2) All compensation received by the fiduciary and its affiliates 
in connection with the transaction neither exceeds compensation for 
services that is reasonable within the meaning of ERISA section 
408(b)(2) and Code section 4975(d)(2).
    (3) The fiduciary's statements about recommended investments, fees 
and compensation, material conflicts of interest, and any other matters 
relevant to the plan's or IRA owner's investment decisions, are not 
materially misleading at the time they are made. A ``material conflict 
of interest'' exists when a fiduciary has a financial interest that a 
reasonable person would conclude could affect the exercise of its best 
judgment as a fiduciary in rendering advice to the plan or IRA owner.
    For purposes of this section, a fiduciary acts in the ``Best 
Interest'' of the plan or IRA when the fiduciary acts with the care, 
skill, prudence, and diligence under the circumstances then prevailing 
that a prudent person acting in a like capacity and familiar with such 
matters would use in the conduct of an enterprise of a like character 
and with like aims, based on the investment objectives, risk tolerance, 
financial circumstances, and needs of the plan or IRA, without regard 
to the financial or other interests of the plan or IRA to the financial 
interests of the fiduciary, any affiliate or other party. Also for the 
purposes of this section, the term IRA means any account or annuity 
described in Code section 4975(e)(1)(B) through (F), including, for 
example, an individual retirement account described in section 408(a) 
of the Code and a health savings account described in section 223(d) of 
the Code.

    Signed at Washington, DC, this 1st day of April, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2016-07930 Filed 4-6-16; 11:15 am]
 BILLING CODE 4510-29-P