Improving Investment Advice for Workers & Retirees, 40834-40865 [2020-14261]
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Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 / Proposed Rules
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2550
[Application No. D–12011]
ZRIN 1210–ZA29
Improving Investment Advice for
Workers & Retirees
Employee Benefits Security
Administration, U.S. Department of
Labor.
ACTION: Notification of Proposed Class
Exemption.
AGENCY:
This document gives notice of
a proposed class exemption from certain
prohibited transaction restrictions of the
Employee Retirement Income Security
Act of 1974, as amended (ERISA), and
the Internal Revenue Code of 1986, as
amended (the Code). The prohibited
transaction provisions of ERISA and the
Code generally prohibit fiduciaries with
respect to employee benefit plans
(Plans) and individual retirement
accounts and annuities (IRAs) from
engaging in self-dealing and receiving
compensation from third parties in
connection with transactions involving
the Plans and IRAs. The provisions also
prohibit purchasing and selling
investments with the Plans and IRAs
when the fiduciaries are acting on
behalf of their own accounts (principal
transactions). This proposed exemption
would allow investment advice
fiduciaries under both ERISA and the
Code to receive compensation,
including as a result of advice to roll
over assets from a Plan to an IRA, and
to engage in principal transactions, that
would otherwise violate the prohibited
transaction provisions of ERISA and the
Code. The exemption would apply to
registered investment advisers, brokerdealers, banks, insurance companies,
and their employees, agents, and
representatives that are investment
advice fiduciaries. The exemption
would include protective conditions
designed to safeguard the interests of
Plans, participants and beneficiaries,
and IRA owners. The new class
exemption would affect participants and
beneficiaries of Plans, IRA owners, and
fiduciaries with respect to such Plans
and IRAs.
DATES: Written comments and requests
for a public hearing on the proposed
class exemption must be submitted to
the Department within August 6, 2020.
The Department proposes that the
exemption, if granted, will be available
60 days after the date of publication of
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SUMMARY:
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the final exemption in the Federal
Register.
ADDRESSES: All written comments and
requests for a hearing concerning the
proposed class exemption should be
sent to the Office of Exemption
Determinations through the Federal
eRulemaking Portal and identified by
Application No. D–12011:
Federal eRulemaking Portal:
www.regulations.gov at Docket ID
number: EBSA–2020–0003. Follow the
instructions for submitting comments.
See SUPPLEMENTARY INFORMATION
below for additional information
regarding comments.
FOR FURTHER INFORMATION CONTACT:
Susan Wilker, telephone (202) 693–
8557, or Erin Hesse, telephone (202)
693–8546, Office of Exemption
Determinations, Employee Benefits
Security Administration, U.S.
Department of Labor (these are not tollfree numbers).
SUPPLEMENTARY INFORMATION:
comment, EBSA recommends that you
include your name and other contact
information, but DO NOT submit
information that you consider to be
confidential, or otherwise protected
(such as Social Security number or an
unlisted phone number), or confidential
business information that you do not
want publicly disclosed. However, if
EBSA cannot read your comment due to
technical difficulties and cannot contact
you for clarification, EBSA might not be
able to consider your comment.
Additionally, the www.regulations.gov
website is an ‘‘anonymous access’’
system, which means EBSA will not
know your identity or contact
information unless you provide it. If you
send an email directly to EBSA without
going through www.regulations.gov,
your email address will be
automatically captured and included as
part of the comment that is placed in the
public record and made available on the
internet.
Comment Instructions
All comments and requests for a
hearing must be received by the end of
the comment period. Requests for a
hearing must state the issues to be
addressed and include a general
description of the evidence to be
presented at the hearing. In light of the
current circumstances surrounding the
COVID–19 pandemic caused by the
novel coronavirus which may result in
disruption to the receipt of comments
by U.S. Mail or hand delivery/courier,
persons are encouraged to submit all
comments electronically and not to
follow with paper copies. The
comments and hearing requests will be
available for public inspection in the
Public Disclosure Room of the
Employee Benefits Security
Administration, U.S. Department of
Labor, Room N–1513, 200 Constitution
Avenue NW, Washington, DC 20210;
however, the Public Disclosure Room
may be closed for all or a portion of the
comment period due to circumstances
surrounding the COVID–19 pandemic
caused by the novel coronavirus.
Comments and hearing requests will
also be available online at
www.regulations.gov, at Docket ID
number: EBSA–2020–0003 and
www.dol.gov/ebsa, at no charge.
Warning: All comments received will
be included in the public record
without change and will be made
available online at www.regulations.gov,
including any personal information
provided, unless the comment includes
information claimed to be confidential
or other information whose disclosure is
restricted by statute. If you submit a
Background
The Employee Retirement Income
Security Act of 1974 (ERISA) section
3(21)(A)(ii) provides, in relevant part,
that a person is a fiduciary with respect
to a Plan to the extent he or she renders
investment advice for a fee or other
compensation, direct or indirect, with
respect to any moneys or other property
of such Plan, or has any authority or
responsibility to do so. Internal Revenue
Code (Code) section 4975(e)(3)(B)
includes a parallel provision that
defines a fiduciary of a Plan and an IRA.
In 1975, the Department issued a
regulation establishing a five-part test
for fiduciary status under this provision
of ERISA.1 The Department’s 1975
regulation also applies to the definition
of fiduciary in the Code, which is
identical in its wording.2
Under the 1975 regulation, for advice
to constitute ‘‘investment advice,’’ a
financial institution or investment
professional who is not a fiduciary
under another provision of the statute
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, Plan
fiduciary or IRA owner that (4) the
advice will serve as a primary basis for
investment decisions with respect to
Plan or IRA assets, and that (5) the
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1 29 CFR 2510.3–21(c)(1), 40 FR 50842 (October
31, 1975).
2 26 CFR 54.4975–9(c), 40 FR 50840 (October 31,
1975).
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Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 / Proposed Rules
advice will be individualized based on
the particular needs of the Plan or IRA.
A financial institution or investment
professional that meets this five-part
test, and receives a fee or other
compensation, direct or indirect, is an
investment advice fiduciary under
ERISA and under the Code.
Investment advice fiduciaries, like
other fiduciaries to Plans and IRAs, are
subject to duties and liabilities
established in Title I of ERISA (ERISA)
and Title II of ERISA (the Internal
Revenue Code or the Code). Under Title
I of ERISA, plan fiduciaries must act
prudently and with undivided loyalty to
employee benefit plans and their
participants and beneficiaries. Although
these statutory fiduciary duties are not
in the Code, both ERISA and the Code
contain provisions forbidding
fiduciaries from engaging in certain
specified ‘‘prohibited transactions,’’
involving Plans and IRAs, including
conflict of interest transactions.3 Under
these prohibited transaction provisions,
a fiduciary may not deal with the
income or assets of a Plan or IRA in his
or her own interest or for his or her own
account, and a fiduciary may not receive
payments from any party dealing with
the Plan or IRA in connection with a
transaction involving assets of the Plan
or IRA. The Department has authority to
grant administrative exemptions from
the prohibited transaction provisions in
ERISA and the Code.4
In 2016, the Department finalized a
new regulation that would have
replaced the 1975 regulation and it
granted new associated prohibited
transaction exemptions. After that
rulemaking was vacated by the U.S.
Court of Appeals for the Fifth Circuit in
2018,5 the Department issued Field
Assistance Bulletin (FAB) 2018–02, a
temporary enforcement policy providing
prohibited transaction relief to
3 ERISA
section 406 and Code section 4975.
section 408(a) and Code section
4975(c)(2). Reorganization Plan No. 4 of 1978 (5
U.S.C. App. (2018)) generally transferred the
authority of the Secretary of the Treasury to grant
administrative exemptions under Code section 4975
to the Secretary of Labor. These provisions require
the Secretary to make the following findings before
granting an administrative exemption: (i) The
exemption is administratively feasible; (ii) the
exemption is in the interests of the Plans and IRAs
and their participants and beneficiaries, and (iii) the
exemption is protective of the rights of participants
and beneficiaries of the Plans and IRAs. The
Department is proposing this new class exemption
on its own motion pursuant to ERISA section 408(a)
and Code section 4975(c)(2), and in accordance
with procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637 (October 27, 2011)).
5 Chamber of Commerce of the United States v.
U.S. Department of Labor, 885 F.3d 360 (5th Cir.
2018). Elsewhere in this issue of the Federal
Register, the Department is publishing a technical
amendment related to the decision.
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investment advice fiduciaries.6 In the
FAB, the Department stated it would not
pursue prohibited transactions claims
against investment advice fiduciaries
who worked diligently and in good faith
to comply with ‘‘Impartial Conduct
Standards’’ for transactions that would
have been exempted in the new
exemptions, or treat the fiduciaries as
violating the applicable prohibited
transaction rules. The Impartial Conduct
Standards have three components: A
best interest standard; a reasonable
compensation standard; and a
requirement to make no misleading
statements about investment
transactions and other relevant matters.
This proposal takes into consideration
the public correspondence and
comments received by the Department
since February 2017 and responds to
informal industry feedback seeking an
administrative class exemption based on
FAB 2018–02. As noted in the FAB,
following the 2016 rulemaking many
financial institutions created and
implemented compliance structures
designed to ensure satisfaction of the
Impartial Conduct Standards. These
parties were permitted to continue to
rely on those structures pending further
guidance. Under the exemption,
financial institutions could continue
relying on those compliance structures
on a permanent basis, subject to the
additional conditions of the exemption,
rather than changing course to begin
complying with the Department’s other
existing exemptions for investment
advice fiduciaries. In addition, the
exemption would provide a defense to
private litigation as well as enforcement
action by the Department, while the
FAB is limited to the latter.
This new proposed exemption would
provide relief that is broader and more
flexible than the Department’s existing
prohibited transaction exemptions for
investment advice fiduciaries. The
Department’s existing exemptions
generally provide relief for discrete,
specifically identified transactions, and
they were not amended to clearly
provide relief for the compensation
arrangements that developed over time.7
6 Available at www.dol.gov/agencies/ebsa/
employers-and-advisers/guidance/field-assistancebulletins/2018-02. The Impartial Conduct Standards
incorporated in the FAB were conditions of the new
exemptions granted in 2016. See Best Interest
Contract Exemption, 81 FR 21002 (Apr. 8, 2016), as
corrected at 81 FR 44773 (July 11, 2016).
7 See e.g., PTE 86–128, Class Exemption for
Securities Transactions involving Employee Benefit
Plans and Broker-Dealers, 51 FR 41686 (Nov. 18,
1986), as amended, 67 FR 64137 (Oct. 17,
2002)(providing relief for a fiduciary’s use of its
authority to cause a Plan or IRA to pay a fee for
effecting or executing securities transactions to the
fiduciary, as agent for the Plan or IRA, and for a
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The exemption would provide
additional certainty regarding covered
compensation arrangements and would
avoid the complexity associated with a
financial institution relying on multiple
exemptions when providing investment
advice.
The proposed exemption’s principlesbased approach is rooted in the
Impartial Conduct Standards for
fiduciaries providing investment advice.
The proposed exemption includes
additional conditions designed to
support the provision of investment
advice that meets the Impartial Conduct
Standards. This notice also sets forth the
Department’s interpretation of the fivepart test of investment advice fiduciary
status and provides the Department’s
views on when advice to roll over Plan
assets to an IRA 8 could be considered
fiduciary investment advice under
ERISA and the Code.
Since 2018, other regulators have
considered enhanced standards of
conduct for investment professionals as
a method of addressing conflicts of
interest. At the federal level, on June 5,
2019, the Securities and Exchange
Commission (SEC) finalized a regulatory
package relating to conduct standards
for broker-dealers and investment
advisers. The package included
Regulation Best Interest, which
establishes a best interest standard
applicable to broker-dealers when
making a recommendation of any
securities transaction or investment
strategy involving securities to retail
customers.9 The SEC also issued an
interpretation of the conduct standards
applicable to registered investment
advisers.10 As part of the package, the
SEC adopted new Form CRS, which
requires broker-dealers and registered
investment advisers to provide retail
fiduciary to act as an agent in an agency cross
transaction for a Plan or IRA and another party to
the transaction and receive reasonable
compensation for effecting or executing the
transaction from the other party to the tranaction);
PTE 84–24 Class Exemption for Certain
Transactions Involving Insurance Agents and
Brokers, Pension Consultants, Insurance
Companies, Investment Companies and Investment
Company Principal Underwriters, 49 FR 13208
(Apr. 3, 1984) , as corrected, 49 FR 24819 (June 15,
1984), as amended, 71 FR 5887 (Feb. 3, 2006)
(providing relief for the receipt of a sales
commission by an insurance agent or broker from
an insurance company in connection with the
purchase, with plan assets, of an insurance or
annuity contract).
8 For purposes of any rollover of assets between
a Plan and an IRA described in this preamble, the
term ‘‘IRA’’ only includes an account or annuity
described in Code section 4975(e)(1)(B) or (C).
9 Regulation Best Interest: The Broker-Dealer
Standard of Conduct, 84 FR 33318 (July 12, 2019)
(Regulation Best Interest Release).
10 Commission Interpretation Regarding Standard
of Conduct for Investment Advisers, 84 FR 33669
(July 12, 2019) (SEC Fiduciary Interpretation).
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investors with a short relationship
summary with specified information
(SEC Form CRS).11
State regulators and standards-setting
bodies also have focused on conduct
standards. The New York State
Department of Financial Services has
amended its insurance regulations to
establish a best interest standard in
connection with life insurance and
annuity transactions.12 The
Massachusetts Securities Division has
amended its regulations for brokerdealers to apply a fiduciary conduct
standard, under which broker-dealers
and their agents must ‘‘[m]ake
recommendations and provide
investment advice without regard to the
financial or any other interest of any
party other than the customer.’’ 13 The
National Association of Insurance
Commissioners has revised its
Suitability In Annuity Transactions
Model Regulation to clarify that all
recommendations by agents and
insurers must be in the best interest of
the consumer and that agents and
carriers may not place their financial
interest ahead of in the consumer’s
interest in making the
recommendation.14
The approach in this proposal
includes Impartial Conduct Standards
that are, in the Department’s view,
aligned with those of the other
regulators. In this way, the proposal is
designed to promote regulatory
efficiencies that might not otherwise
exist under the Department’s existing
administrative exemptions for
investment advice fiduciaries.
This proposed exemption is expected
to be an Executive Order (E.O.) 13771
deregulatory action because it would
allow investment advice fiduciaries
with respect to Plans and IRAs to
receive compensation and engage in
certain principal transactions that
would otherwise be prohibited under
ERISA and the Code. The temporary
enforcement policy stated in FAB 2018–
02 remains in place. The Department is
proposing this class exemption 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 (76 FR 66637
(October 27, 2011)).
11 Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (July 12,
2019)(Form CRS Relationship Summary Release).
12 New York State Department of Financial
Services Insurance Regulation 187, 11 NYCRR 224,
First Amendment, effective August 1, 2019.
13 950 Mass. Code Regs. 12.204 & 12.207 as
amended effective March 6, 2020.
14 NAIC Takes Action to Protect Annuity
Consumers; available at https://content.naic.org/
article/news_release_naic_takes_action_protect_
annuity_consumers.htm.
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Description of the Proposed Exemption
As discussed in greater detail below,
the exemption proposed in this notice
would be available to registered
investment advisers, broker-dealers,
banks, and insurance companies
(Financial Institutions) and their
individual employees, agents, and
representatives (Investment
Professionals) that provide fiduciary
investment advice to Retirement
Investors. The proposal defines
Retirement Investors as Plan
participants and beneficiaries, IRA
owners, and Plan and IRA fiduciaries.15
Under the exemption, Financial
Institutions and Investment
Professionals could receive a wide
variety of payments that would
otherwise violate the prohibited
transaction rules, including, but not
limited to, commissions, 12b–1 fees,
trailing commissions, sales loads, markups and mark-downs, and revenue
sharing payments from investment
providers or third parties. The
exemption’s relief would extend to
prohibited transactions arising as a
result of investment advice to roll over
assets from a Plan to an IRA, as detailed
later in this proposed exemption. The
exemption also would allow Financial
Institutions to engage in principal
transactions with Plans and IRAs in
which the Financial Institution
purchases or sells certain investments
from its own account.
As noted above, ERISA and the Code
include broad prohibitions on selfdealing. Absent an exemption, a
fiduciary may not deal with the income
or assets of a Plan or IRA in his or her
own interest or for his or her own
account, and a fiduciary may not receive
payments from any party dealing with
the Plan or IRA in connection with a
transaction involving assets of the Plan
or IRA. As a result, fiduciaries who use
their authority to cause themselves or
15 The term ‘‘Plan’’ is defined for purposes of the
exemption as any employee benefit plan described
in ERISA section 3(3) and any plan described in
Code section 4975(e)(1)(A). The term ‘‘Individual
Retirement Account’’ or ‘‘IRA’’ is defined as any
account or annuity described in Code section
4975(e)(1)(B) through (F), including an Archer
medical savings account, a health savings account,
and a Coverdell education savings account.
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their affiliates 16 or related entities 17 to
receive additional compensation violate
the prohibited transaction provisions
unless an exemption applies.18
The proposed exemption would
condition relief on the Investment
Professional and Financial Institution
providing advice in accordance with the
Impartial Conduct Standards. In
addition, the exemption would require
Financial Institutions to acknowledge in
writing their and their Investment
Professionals’ fiduciary status under
ERISA and the Code, as applicable,
when providing investment advice to
the Retirement Investor, and to describe
in writing the services to be provided
and the Financial Institutions’ and
Investment Professionals’ material
conflicts of interest. Finally, Financial
Institutions would be required to adopt
policies and procedures prudently
designed to ensure compliance with the
Impartial Conduct Standards and
conduct a retrospective review of
compliance. The exemption would also
provide, subject to additional
safeguards, relief for Financial
Institutions to enter into principal
transactions with Retirement Investors,
in which they purchase or sell certain
investments from their own accounts.
The exemption requires Financial
Institutions to provide reasonable
oversight of Investment Professionals
and to adopt a culture of compliance.
The proposal further provides that
Financial Institutions and Investment
Professionals would be ineligible to rely
on the exemption if, within the previous
10 years, they were convicted of certain
crimes arising out of their provision of
investment advice to Retirement
Investors; they would also be ineligible
if they engaged in systematic or
16 For purposes of the exemption, an affiliate
would include: (1) Any person directly or indirectly
through one or more intermediaries, controlling,
controlled by, or under common control with the
Investment Professional or Financial Institution.
(For this purpose, ‘‘control’’ would mean the power
to exercise a controlling influence over the
management or policies of a person other than an
individual) (2) Any officer, director, partner,
employee, or relative (as defined in ERISA section
3(15)), of the Investment Professional or Financial
Institution; and (3) Any corporation or partnership
of which the Investment Professional or Financial
Institution is an officer, director, or partner.
17 For purposes of the exemption, related entities
would include entities that are not affiliates, but in
which the Investment Professional or Financial
Institution has an interest that may affect the
exercise of its best judgment as a fiduciary.
18 As articulated in the Department’s regulations,
‘‘a fiduciary may not use the authority, control, or
responsibility which makes such a person a
fiduciary to cause a plan to pay an additional fee
to such fiduciary (or to a person in which such
fiduciary has an interest which may affect the
exercise of such fiduciary’s best judgment as a
fiduciary) to provide a service.’’ 29 CFR 2550.408b–
2(e)(1).
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intentional violation of the exemption’s
conditions or provided materially
misleading information to the
Department in relation to their conduct
under the exemption. Ineligible parties
could rely on an otherwise available
statutory exemption or apply for an
individual prohibited transaction
exemption from the Department. This
targeted approach of allowing the
Department to give special attention to
parties with certain criminal
convictions or with a history of
egregious conduct with respect to
compliance with the exemption should
provide significant protections for
Retirement Investors while preserving
wide availability of investment advice
arrangements and products.
The proposed exemption would not
expand Retirement Investors’ ability to
enforce their rights in court or create
any new legal claims above and beyond
those expressly authorized in ERISA,
such as by requiring contracts and/or
warranty provisions.19
Scope of Relief
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Financial Institutions
The exemption would be available to
entities that satisfy the exemption’s
definition of a ‘‘Financial Institution.’’
The proposal limits the types of entities
that qualify as a Financial Institution to
SEC- and state-registered investment
advisers, broker-dealers, insurance
companies and banks.20 The proposed
definition is based on the entities
identified in the statutory exemption for
investment advice under ERISA section
408(b)(14) and Code section 4975(d)(17),
which are subject to well-established
regulatory conditions and oversight.21
Congress determined that this group of
entities could prudently mitigate certain
conflicts of interest in their investment
advice through adherence to tailored
principles under the statutory
exemption. The Department takes a
similar approach here, and therefore is
proposing to include the same group of
entities. To fit within the definition of
Financial Institution, the firm must not
have been disqualified or barred from
19 ERISA section 502(a) provides the Secretary of
Labor and plan participants and beneficiaries with
a cause of action for fiduciary breaches and
prohibited transactions with respect to ERISAcovered Plans (but not IRAs). Code section 4975
imposes a tax on disqualified persons participating
in a prohibited transaction involving Plans and
IRAs (other than a fiduciary acting only as such).
20 The proposal includes ‘‘a bank or similar
financial institution supervised by the United States
or a state, or a savings association (as defined in
section 3(b)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)).’’ The Department would
interpret this definition to extend to credit unions.
21 ERISA section 408(g)(11)(A) and Code section
4975(f)(8)(J)(i).
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making investment recommendations by
any insurance, banking, or securities
law or regulatory authority (including
any self-regulatory organization).
The Department recognizes that
different types of Financial Institutions
have different business models, and the
proposal is drafted to apply flexibly to
these institutions.22 Broker-dealers, for
example, provide a range of services to
Retirement Investors, ranging from
executing one-time transactions to
providing personalized investment
recommendations, and they may be
compensated on a transactional basis
such as through commissions.23 If
broker-dealers that are investment
advice fiduciaries with respect to
Retirement Investors provide
investment advice that affects the
amount of their compensation, they
must rely on an exemption.
Registered investment advisers, by
contrast, generally provide ongoing
investment advice and services and are
commonly paid either an assets under
management fee or a fixed fee.24 If a
registered investment adviser is an
investment advice fiduciary that charges
only a level fee that does not vary on the
basis of the investment advice provided,
the registered investment adviser may
not violate the prohibited transaction
rules.25 However, if the registered
investment adviser provides investment
advice that causes itself to receive the
level fee, such as through advice to roll
over Plan assets to an IRA, the fee
(including an ongoing management fee
paid with respect to the IRA) is
prohibited under ERISA and the Code.26
Additionally, if a registered investment
adviser that is an investment advice
fiduciary is dually-registered as a
broker-dealer, the registered investment
adviser may engage in a prohibited
transaction if it recommends a
transaction that increases the brokerdealer’s compensation, such as for
execution of securities transactions. As
noted above, it is a prohibited
22 Some of the Department’s existing prohibited
transaction exemptions would also apply to the
transactions described in the next few paragraphs.
23 Regulation Best Interest Release, 84 FR at
33319.
24 Id.
25 As noted above, fiduciaries who use their
authority to cause themselves or their affiliates or
related entities to receive additional compensation
violate the prohibited transaction provisions unless
an exemption applies. 29 CFR 2550.408b–2(e)(1).
26 The Department has long interpreted the
requirement of a fee to broadly cover ‘‘all fees or
other compensation incident to the transaction in
which the investment advice to the plan has been
rendered or will be rendered.’’ Preamble to the
Department’s 1975 Regulation, 40 FR 50842
(October 31, 1975). The Department’s analysis of
the five-part test’s application to rollovers is
discussed below.
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40837
transaction for a fiduciary to use its
authority to cause an affiliate or related
entity to receive additional
compensation.27
Insurance companies commonly
compensate insurance agents on a
commission basis, which generally
creates prohibited transactions when
insurance agents are investment advice
fiduciaries that provide investment
advice to Retirement Investors in
connection with the sales. However, the
Department is aware that insurance
companies often sell insurance products
and fixed (including indexed) annuities
through different distribution channels
than broker-dealers and registered
investment advisers. While some
insurance agents are employees of an
insurance company, other insurance
agents are independent, and work with
multiple insurance companies. The
proposed exemption would apply to
either of these business models.
Insurance companies can supervise
independent insurance agents and they
can also create oversight and
compliance systems through contracts
with intermediaries such as
independent marketing organizations
(IMOs), field marketing organizations
(FMOs) or brokerage general agencies
(BGAs).28 Eligible parties can also
continue to use relief under the existing
exemption for insurance transactions,
PTE 84–24, as an alternative.29 The
Department requests comment on these
suggestions, and whether there are
alternatives for oversight of investment
advice fiduciaries who also serve as
insurance agents.
Finally, banks and similar institutions
would be permitted to act as Financial
Institutions under the exemption if they
or their employees are investment
advice fiduciaries with respect to
Retirement Investors. The Department
seeks comment on whether banks and
their employees provide investment
advice to Retirement Investors, and if
so, whether the proposal needs
27 29
CFR 2550.408b–2(e)(1).
the proposal’s definition of Financial
Institution does not include insurance
intermediaries, the Department seeks comments on
whether the exemption should include insurance
intermediaries as Financial Institutions for the
recommendation of fixed (including indexed)
annuity contracts. If so, the Department asks parties
to provide a definition of the type of intermediary
that should be permitted to operate as a Financial
Institution and whether any additional protective
conditions might be necessary with respect to the
intermediary.
29 Class Exemption for Certain Transactions
Involving Insurance Agents and Brokers, Pension
Consultants, Insurance Companies, Investment
Companies and Investment Company Principal
Underwriters, 49 FR 13208 (Apr. 3, 1984), as
corrected, 49 FR 24819 (June 15, 1984), as amended,
71 FR 5887 (Feb. 3, 2006).
28 Although
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adjustment to address any unique
aspects of their business models. The
Department seeks comment on other
business models not listed here, and
invites commenters to explain whether
other business models would be
appropriate to include in this
framework.
The proposal also allows the
definition of Financial Institution to
expand after the exemption is finalized
based upon subsequent grants of
individual exemptions to additional
entities that are investment advice
fiduciaries that meet the five-part test
seeking to be treated as covered
Financial Institutions. Additional types
of entities, such as IMOs, FMOs, or
BGAs, that are investment advice
fiduciaries may separately apply for
relief for the receipt of compensation in
connection with the provision of
investment advice on the same
conditions as apply to the Financial
Institutions covered by the proposed
exemption.30 If the Department grants
an individual exemption under ERISA
section 408(a) and Code section 4975(c)
after the date this exemption is granted,
the expanded definition of Financial
Institution in the individual exemption
would be added to this class exemption
so other entities that satisfy the
definition could similarly use the class
exemption. The Department requests
comment on the procedural aspects,
e.g., ensuring sufficient notice to
Retirement Investors, of this permitted
expansion of the definition.
The Department seeks comment on
the definition of Financial Institution in
general and whether any other type of
entity should be included. The
Department also seeks comment as to
whether the definition is overly broad,
or whether Retirement Investors would
benefit from a narrowed list of Financial
Institutions. In addition, the Department
requests comment on whether the
definition of Financial Institution is
sufficiently broad to cover firms that
render advice with respect to
investments in Health Savings Accounts
(HSA), and about the extent to which
Plan participants receive investment
advice in connection with such
accounts.
Investment Professionals
As defined in the proposal, an
Investment Professional is an individual
who is a fiduciary of a Plan or IRA by
30 Exemption relief for an insurance intermediary
would only be required if the intermediary is an
investment advice fiduciary under the applicable
regulations. An exemption is not necessary for an
insurance intermediary or its insurance agents who
conduct sales transactions and are not fiduciaries
under ERISA or the Code.
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reason of the provision of investment
advice, who is an employee,
independent contractor, agent or
representative of a Financial Institution,
and who satisfies the federal and state
regulatory and licensing requirements of
insurance, banking, and securities laws
(including self-regulatory organizations)
with respect to the covered transaction,
as applicable. Similar to the definition
of Financial Institution, this definition
also includes a requirement that the
Investment Professional has not been
disqualified from making investment
recommendations by any insurance,
banking, or securities law or regulatory
authority (including any self-regulatory
organization).
Covered Transactions
The proposal would permit Financial
Institutions and Investment
Professionals, and their affiliates and
related entities, to receive reasonable
compensation as a result of providing
fiduciary investment advice. The
exemption specifically covers
compensation received as a result of
investment advice to roll over assets
from a Plan to an IRA. The exemption
also would provide relief for a Financial
Institution to engage in the purchase or
sale of an asset in a riskless principal
transaction or a Covered Principal
Transaction, and receive a mark-up,
mark-down, or other payment. The
exemption would provide relief from
ERISA section 406(a)(1)(A) and (D) and
406(b) and Code section 4975(c)(1)(A),
(D), (E), and (F).31
Subsection (1) of the exemption
would provide broad relief for Financial
Institutions and Investment
Professionals that are investment advice
fiduciaries to receive all forms of
reasonable compensation as a result of
their investment advice to Retirement
Investors. For example, it would cover
compensation received as a result of
investment advice to acquire, hold,
dispose of, or exchange securities and
other investments. It would also cover
compensation received as a result of
investment advice to take a distribution
from a Plan or to roll over the assets to
an IRA, or from investment advice
regarding other similar transactions
including (but not limited to) rollovers
from one Plan to another Plan, one IRA
to another IRA, or from one type of
account to another account (e.g., from a
commission-based account to a feebased account). The exemption would
31 The proposal does not include relief from
ERISA section 406(a)(1)(C) and Code section
4975(c)(1)(C). The statutory exemptions, ERISA
section 408(b)(2) and Code section 4975(d)(2)
provide this necessary relief for Plan or IRA service
providers, subject the applicable conditions.
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cover compensation received as a result
of investment advice as to persons the
Retirement Investor may hire to serve as
an investment advice provider or asset
manager.
Subsection (2) of the exemption
would address the circumstance in
which the Financial Institution may, in
addition to providing investment
advice, engage in a purchase or sale of
an investment with a Retirement
Investor and receive a mark-up or a
mark-down or similar payment on the
transaction. The exemption would
extend to both riskless principal
transactions and Covered Principal
Transactions. A riskless principal
transaction is a transaction in which a
Financial Institution, after having
received an order from a Retirement
Investor to buy or sell an investment
product, purchases or sells the same
investment product for the Financial
Institution’s own account to offset the
contemporaneous transaction with the
Retirement Investor. Covered Principal
Transactions are defined in the
exemption as principal transactions
involving certain specified types of
investments, discussed in more detail
below. Principal transactions that are
not riskless and that do not fall within
the definition of Covered Principal
Transaction would not be covered by
the exemption.
The following sections provide
additional information on the proposal
as it would apply to investment advice
to roll over ERISA-covered Plan assets
to an IRA, and as it would apply to
Covered Principal Transactions.
Rollovers
Amounts accrued in an ERISAcovered Plan can represent a lifetime of
savings, and often comprise the largest
sum of money a worker has at
retirement. Therefore, the decision to
roll over ERISA-covered Plan assets to
an IRA is potentially a very
consequential financial decision for a
Retirement Investor. For example,
Retirement Investors may incur
transaction costs associated with
moving the assets into new investments
and accounts, and, because of the loss
of economies of scale, the cost of
investing through an IRA may be higher
than through a Plan.32 Retirement
32 See, e.g., ‘‘IRA Investors Are Concentrated in
Lower-Cost Mutual Funds’’ (Aug. 8, 2018), available
at https://www.ici.org/viewpoints/view_18_ira_
expenses_fees (‘‘The data show that 401(k) investors
incur lower expense ratios in their mutual fund
holdings than IRA mutual fund investors. One
reason for this is economies of scale, as many
employer plans aggregate the savings of hundreds
or thousands of workers, and often carry large
average account balances, which are more costeffective to service. In addition, employers that
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Investors who roll out of ERISA-covered
Plans also lose important ERISA
protections, including the benefit of a
Plan fiduciary representing their
interests in selecting a menu of
investment options or structuring
investment advice relationships, and the
statutory causes of action to protect
their interests. Retirement Investors who
are retirees may not have the ability to
earn additional amounts to offset any
costs or losses.
Rollovers from ERISA-covered Plans
to IRAs were expected to approach $2.4
trillion cumulatively from 2016 through
2020.33 These large sums of money
eligible for rollover represent a
significant revenue source for
investment advice providers. A firm that
recommends a rollover to a Retirement
Investor can generally expect to earn
transaction-based compensation such as
commissions, or an ongoing advisory
fee, from the IRA, but may or may not
earn compensation if the assets remain
in the Plan.
In light of potential conflicts of
interest related to rollovers from Plans
to IRAs, ERISA and the Code prohibit an
investment advice fiduciary from
receiving fees resulting from investment
advice to Plan participants to roll over
assets from a Plan to an IRA, unless an
exemption applies. The proposed
exemption would provide relief, as
needed, for this prohibited transaction,
if the Financial Institution and
Investment Professional provide
investment advice that satisfies the
Impartial Conduct Standards and they
comply with the other applicable
conditions discussed below.34 In
particular, the Financial Institution
would be required to document the
reasons that the advice to roll over was
in the Retirement Investor’s best
interest. In addition, investment advice
fiduciaries under Title I of ERISA would
remain subject to the fiduciary duties
imposed by section 404 of that statute.
In determining the fiduciary status of
an investment advice provider in this
context, the Department does not intend
to apply the analysis in Advisory
Opinion 2005–23A (the Deseret Letter),
sponsor 401(k) plans may defray some of the costs
of running the plan, enabling the sponsor to select
lower-cost funds (or fund share classes) for the
plan.’’)
33 Cerulli Associates, ‘‘U.S. Retirement Markets
2019.’’
34 The exemption would also provide relief for
investment advice fiduciaries under either ERISA or
the Code to receive compensation for advice to roll
Plan assets to another Plan, to roll IRA assets to
another IRA or to a Plan, and to transfer assets from
one type of account to another, all limited to the
extent such rollovers are permitted under law. The
analysis set forth in this section will apply as
relevant to those transactions as well.
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which suggested that advice to roll
assets out of a Plan did not generally
constitute investment advice. The
Department believes that the analysis in
the Deseret Letter was incorrect and that
advice to take a distribution of assets
from an ERISA-covered Plan is actually
advice to sell, withdraw, or transfer
investment assets currently held in the
Plan. A recommendation to roll assets
out of a Plan is necessarily a
recommendation to liquidate or transfer
the Plan’s property interest in the
affected assets, the participant’s
associated property interest in the Plan
investments, and the fiduciary oversight
structure that applies to the assets.
Typically the assets, fees, asset
management structure, investment
options, and investment service options
all change with the decision to roll
money out of the Plan. Accordingly, the
better view is that a recommendation to
roll assets out of a Plan is advice with
respect to moneys or other property of
the Plan. Moreover, a distribution
recommendation commonly involves
either advice to change specific
investments in the Plan or to change
fees and services directly affecting the
return on those investments.35
All prongs of the five-part test must be
satisfied for the investment advice
provider to be a fiduciary within the
meaning of the regulatory definition,
including the ‘‘regular basis’’ prong and
the prongs requiring the advice to be
provided pursuant to a ‘‘mutual’’
agreement, arrangement, or
understanding that the advice will serve
as ‘‘a primary basis’’ for investment
decisions. As discussed below, these
inquiries will be informed by all the
surrounding facts and circumstances.
The Department acknowledges that
advice to take a distribution from a Plan
and roll over the assets may be an
isolated and independent transaction
that would fail to meet the regular basis
prong.36 However, the Department
believes that whether advice to roll over
Plan assets to an IRA satisfies the
regular-basis prong of the five-part test
depends on the surrounding facts and
circumstances. The Department has long
interpreted advice to a Plan to include
advice to participants and beneficiaries
in participant-directed individual
35 The SEC and FINRA have each recognized that
recommendations to roll over Plan assets to an IRA
will almost always involve a securities transaction.
See Regulation Best Interest Release, 84 FR at
33339; FINRA Regulatory Notice 13–45 Rollovers to
Individual Retirement Accounts (December 2013),
available at https://www.finra.org/sites/default/
files/NoticeDocument/p418695.pdf.
36 Merely executing a sales transaction at the
customer’s request also does not confer fiduciary
status.
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account pension plans.37 The
Department also recognizes that advice
to roll over Plan assets can occur as part
of an ongoing relationship or an
anticipated ongoing relationship that an
individual enjoys with his or her advice
provider. For example, in circumstances
in which the advice provider has been
giving financial advice to the individual
about investing in, purchasing, or
selling securities or other financial
instruments, the advice to roll assets out
of a Plan is part of an ongoing advice
relationship that satisfies the ‘‘regular
basis’’ requirement. Similarly, advice to
roll assets out of the Plan into an IRA
where the advice provider will be
regularly giving financial advice
regarding the IRA in the course of a
more lengthy financial relationship
would be the start of an advice
relationship that satisfies the ‘‘regular
basis’’ requirement. In these scenarios,
there is advice to the Plan—meaning the
Plan participant or beneficiary—on a
regular basis. The Department is
disinclined to propose an exemption
that would artificially exclude rollover
advice from investment advice when
that would be contrary to the parties’
course of dealing and expectations. And
it is more than reasonable, as discussed
below, that the advice provider would
anticipate that advice about rolling over
Plan assets would be ‘‘a primary basis
for [those] investment decisions.’’
This interpretation would both align
the Department’s approach with other
regulators and protect Plan participants
and beneficiaries under today’s market
practices, including the increasing
prevalence of 401(k) plans and selfdirected accounts. Numerous sources
acknowledge that a common purpose of
advice to roll over Plan assets is to
establish an ongoing relationship in
which advice is provided on a regular
basis outside of the Plan, in return for
a fee or other compensation. For
example, in a 2013 notice reminding
firms of their responsibilities regarding
IRA rollovers, the Financial Industry
Regulatory Authority (FINRA) stated
that ‘‘a financial adviser has an
economic incentive to encourage an
investor to roll Plan assets into an IRA
that he will represent as either a brokerdealer or an investment adviser
representative.’’ 38 Similarly, in 2011,
the U.S. Government Accountability
Office (GAO) discussed the practice of
cross-selling, in which 401(k) service
providers sell Plan participants
products and services outside of their
Plans, including IRA rollovers. GAO
reported that industry professionals said
37 Interpretive
38 FINRA
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‘‘cross-selling IRA rollovers to
participants, in particular, is an
important source of income for service
providers.’’ 39
Therefore, the regular basis prong of
the five-part test would be satisfied
when an entity with a pre-existing
advice relationship with the Retirement
Investor advises the Retirement Investor
to roll over assets from a Plan to an IRA.
Similarly, for an investment advice
provider who establishes a new
relationship with a Plan participant and
advises a rollover of assets from the Plan
to an IRA, the rollover recommendation
may be seen as the first step in an
ongoing advice relationship that could
satisfy the regular basis prong of the
five-part test depending on the facts and
circumstances.40
Further, the determination of whether
there is a mutual agreement,
arrangement, or understanding that the
investment advice will serve as a
primary basis for investment decisions
is appropriately based on the reasonable
understanding of each of the parties, if
no mutual agreement or arrangement is
demonstrated. Written statements
disclaiming a mutual understanding or
forbidding reliance on the advice as a
primary basis for investment decisions
are not determinative, although such
statements are appropriately considered
in determining whether a mutual
understanding exists.
More generally, the Department
emphasizes that the five-part test does
not look at whether the advice serves as
‘‘the’’ primary basis of investment
decisions, but whether it serves as ‘‘a’’
primary basis. When financial service
professionals make recommendations to
a Retirement Investor, particularly
pursuant to a best interest standard such
as the one in the SEC’s Regulation Best
Interest, or another requirement to
provide advice based on the
individualized needs of the Retirement
Investor, the parties typically should
reasonably understand that the advice
will serve as at least a primary basis for
the investment decision. By contrast, a
one-time sales transaction, such as the
39 U.S. General Accountability Office, 401(k)
Plans: Improved Regulation Could Better Protect
Participants from Conflicts of Interest, GAO 11–119
(Washington, DC 2011), available at https://
www.gao.gov/assets/320/315363.pdf.
40 The Department is aware that some Financial
Institutions pay unrelated parties to solicit clients
for them. See Rule 206(4)–3 under the Investment
Advisers Act of 1940; see also Investment Advisers
Advertisements; Compensation for Solicitations,
Proposed Rule, 84 FR 67518 (December 10, 2019).
The Department notes that advice by a paid
solicitor to take a distribution from a Plan and to
roll over assets to an IRA could be part of ongoing
advice to a Retirement Investor, if the Financial
Institution that pays the solicitor provides ongoing
fiduciary advice to the IRA owner.
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one-time sale of an insurance product,
does not by itself confer fiduciary status
under ERISA or the Code, even if
accompanied by a recommendation that
the product is well-suited to the
investor and would be a valuable
purchase.41
In addition to satisfying the five-part
test, a person must receive a fee or other
compensation to be an investment
advice fiduciary. The Department has
long interpreted this requirement
broadly to cover ‘‘all fees or other
compensation incident to the
transaction in which the investment
advice to the plan has been rendered or
will be rendered.’’ 42 The Department
previously noted that ‘‘this may include,
for example, brokerage commissions,
mutual fund sales commissions, and
insurance sales commissions.’’ 43 In the
rollover context, fees and compensation
received from transactions involving
rollover assets would be incident to the
advice to take a distribution from the
Plan and to roll over the assets to an
IRA. If, under the above analysis, advice
to roll over Plan assets to an IRA is
fiduciary investment advice under
ERISA, the fiduciary duties of prudence
and loyalty would apply to the initial
instance of advice to take the
distribution and to roll over the assets.
Fiduciary investment advice concerning
investment of the rollover assets and
ongoing management of the assets, once
distributed from the Plan into the IRA,
would be subject to obligations in the
Code. For example, a broker-dealer who
satisfies the five-part test with respect to
a Retirement Investor, advises that
Retirement Investor to move his or her
assets from a Plan to an IRA, and
receives any fees or compensation
incident to distributing those assets,
will be a fiduciary subject to ERISA,
including section 404, with respect to
the advice regarding the rollover.
The Department requests comment on
all aspects of this part of its proposal.
For instance: Are there other rollover
scenarios that are not clear and which
the Department should address? Does
the discussion above reflect real-world
experiences and concerns? Does it
provide enough clarity to financial
entities interested in the proposed
exemption?
41 Like other Investment Professionals, however,
insurance agents may have or contemplate an
ongoing advice relationship with a customer. For
example, agents who receive trailing commissions
on annuity transactions may continue to provide
ongoing recommendations or service with respect to
the annuity.
42 Preamble to the Department’s 1975 Regulation,
40 FR 50842 (October 31, 1975).
43 Id.
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Principal Transactions
Principal transactions involve the
purchase from, or sale to, a Plan or IRA,
of an investment, on behalf of the
Financial Institution’s own account or
the account of a person directly or
indirectly, through one or more
intermediaries, controlling, controlled
by, or under common control with the
Financial Institution. Because an
investment advice fiduciary engaging in
a principal transaction is on both sides
of the transaction, the firm has a clear
conflict. In addition, the securities
typically traded in principal
transactions often lack pre-trade price
transparency and Retirement Investors
may, therefore, have difficulty
evaluating the fairness of a particular
principal transaction. These
investments also can be associated with
low liquidity, low transparency, and the
possible incentive to sell unwanted
investments held by the Financial
Institution.
Consistent with the Department’s
historical approach to prohibited
transaction exemptions for fiduciaries,
this proposal includes relief for
principal transactions that is limited in
scope and subject to additional
conditions, as set forth in the definition
of Covered Principal Transactions,
described below. Importantly, certain
transactions would not be considered
principal transactions for purposes of
the exemption, and so could occur
under the more general conditions. This
includes the sale of an insurance or
annuity contract, or a mutual fund
transaction.
Principal transactions that are
‘‘riskless principal transactions’’ would
be covered under the exemption as well,
subject to the general conditions. A
riskless principal transaction is a
transaction in which a Financial
Institution, after having received an
order from a Retirement Investor to buy
or sell an investment product, purchases
or sells the same investment product in
a contemporaneous transaction for the
Financial Institution’s own account to
offset the transaction with the
Retirement Investor. The Department
requests comment on whether the
exemption text should include a
definition of the terms ‘‘principal
transaction’’ and ‘‘riskless principal
transaction.’’
The proposal uses the defined term
‘‘Covered Principal Transaction’’ to
describe the types of non-riskless
principal transactions that would be
covered under the exemption. For
purchases from a Plan or IRA, the term
is broadly defined to include any
securities or other investment property.
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This is to reflect the possibility that a
principal transaction will be needed to
provide liquidity to a Retirement
Investor. However, for sales to a Plan or
IRA, the proposed exemption would
provide more limited relief. For those
sales, the definition of Covered
Principal Transaction would be limited
to transactions involving: corporate debt
securities offered pursuant to a
registration statement under the
Securities Act of 1933; U.S. Treasury
securities; debt securities issued or
guaranteed by a U.S. federal government
agency other than the U.S. Department
of Treasury; debt securities issued or
guaranteed by a government-sponsored
enterprise (GSE); municipal bonds;
certificates of deposit; and interests in
Unit Investment Trusts. The Department
seeks comment on whether any of these
investments should be further defined
for clarity.
The Department intends for this
exemption to accommodate new and
additional investments, as appropriate.
Accordingly, the definition of Covered
Principal Transaction is designed to
expand to include additional
investments if the Department grants an
individual exemption that provides
relief for investment advice fiduciaries
to sell the investment to a Retirement
Investor in a principal transaction,
under the same conditions as this class
exemption.
For sales of a debt security to a Plan
or IRA, the definition of Covered
Principal Transaction would require the
Financial Institution to adopt written
policies and procedures related to credit
quality and liquidity. Specifically, the
policies and procedures must be
reasonably designed to ensure that the
debt security, at the time of the
recommendation, has no greater than
moderate credit risk and has sufficient
liquidity that it could be sold at or near
its carrying value within a reasonably
short period of time. This standard is
intended to identify investment grade
securities, and is included to prevent
the exemption from being available to
Financial Institutions that recommend
speculative debt securities from their
own accounts.
The proposal is broader than the
scope of FAB 2018–02, which did not
include principal transactions involving
municipal bonds. The Department
cautions, however, that Financial
Institutions and Investment
Professionals should pay special care to
the reasons for advising Retirement
Investors to invest in municipal bonds.
Tax-exempt municipal bonds are often a
poor choice for investors in ERISA plans
and IRAs because the plans and IRAs
are already tax advantaged and,
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therefore, do not benefit from paying for
the bond’s tax-favored status.44
Financial Institutions and Investment
Professionals may wish to document the
reasons for any recommendation of a
tax-exempt municipal bond and why
the recommendation, despite the tax
consequences, was in the Retirement
Investor’s best interest.
The Department seeks public
comment on all aspects of the proposal’s
treatment of principal transactions,
including the proposal to provide relief
in this exemption for principal
transactions involving municipal bonds.
Do commenters believe that the
exemption should extend to principal
transactions involving municipal
bonds? Do commenters believe the
definition of municipal bonds should be
limited to taxable municipal bonds?
Should the exemption include any
additional safeguards for these
transactions? Are there any other
transactions that would benefit from
special care before making a
recommendation in addition to
municipal bonds? The Department
requests comments on whether its
proposed mechanism for including new
and additional investments through
later, individual exemptions provides
sufficient flexibility.
Exclusions
Section I(c) provides that certain
specific transactions would be excluded
from the exemption. Under Section
I(c)(1), the exemption would not extend
to transactions involving ERISA-covered
Plans if the Investment Professional,
Financial Institution, or an affiliate is
either (1) the employer of employees
covered by the Plan, or (2) is a named
fiduciary or plan administrator, or an
affiliate thereof, who was selected to
provide advice to the Plan by a fiduciary
who is not independent of the Financial
Institution, Investment Professional, and
their affiliates. The Department is of the
view that, to protect employees from
abuse, employers generally should not
be in a position to use their employees’
retirement benefits as potential revenue
or profit sources, without additional
44 See e.g., Seven Questions to Ask When
Investing in Municipal Bonds, available at https://
www.msrb.org/∼/media/pdfs/msrb1/pdfs/sevenquestions-when-investing.ashx. (‘‘[T]ax-exempt
bonds may not be an efficient investment for certain
tax advantaged accounts, such as an IRA or 401k,
as the tax-advantages of such accounts render the
tax-exempt features of municipal bonds redundant.
Furthermore, since withdrawals from most of those
accounts are subject to tax, placing a tax exempt
bond in such an account has the effect of converting
tax-exempt income into taxable income. Finally, if
an investor purchases bonds in the secondary
market at a discount, part of the gain received upon
sale may be subject to regular income tax rates
rather than capital gains rates.’’)
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40841
safeguards. Employers can always
render advice and recover their direct
expenses in transactions involving their
employees without need of an
exemption.45 Further, the Department
does not intend for the exemption to be
used by a Financial Institution or
Investment Professional that is the
named fiduciary or plan administrator
of a Plan or an affiliate thereof, unless
the Financial Institution or Investment
Professional is selected as an advice
provider by a party that is independent
of them.46 Named fiduciaries and plan
administrators have significant
authority over Plan operations and
accordingly, the Department believes
that any selection of these parties to also
provide investment advice to the Plan or
its participants and beneficiaries should
be made by an independent party who
will also monitor the performance of the
investment advice services.
As reflected in Section I(c)(2), the
exemption also would not extend to
transactions that result from robo-advice
arrangements that do not involve
interaction with an Investment
Professional. Congress previously
granted statutory relief for investment
advice programs using computer models
in ERISA sections 408(b)(14) and 408(g)
and Code sections 4975(d)(17) and
4975(f)(8) and the Department has
promulgated applicable regulations
thereunder.47 Thus, while ‘‘hybrid’’
robo-advice arrangements 48 would be
permitted under the exemption,
arrangements in which the only
investment advice provided is generated
by a computer model would not be
eligible for relief under the exemption.
The Department requests comment on
whether additional relief is needed for
robo-advice arrangements which do not
45 ERISA section 408(b)(5) provides a statutory
exemption for the purchase of life insurance, health
insurance, or annuities, from an employer with
respect to a Plan or a wholly-owned subsidiary of
the employer.
46 For purposes of this exemption, the Department
would view a party as independent of the Financial
Institution and Investment Professional if: (i) The
person was not the Financial Institution,
Investment Professional or an affiliate, (ii) the
person did not have a relationship to or an interest
in the Financial Institution, Investment Professional
or any affiliate that might affect the exercise of the
person’s best judgment in connection with
transactions covered by the exemption, and (iii) the
party does not receive and is not projected to
receive within the current federal income tax year,
compensation or other consideration for his or her
own account from the Financial Institution,
Investment Professional or an affiliate, in excess of
2% of the person’s annual revenues based upon its
prior income tax year.
47 29 CFR 2550.408g–1.
48 Hybrid robo-advice arrangements involve both
computer software-based models and personal
investment advice from an Investment Professional.
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involve interaction with an Investment
Professional.
Finally, under Section I(c)(3), the
exemption would not extend to
transactions in which the Investment
Professional is acting in a fiduciary
capacity other than as an investment
advice fiduciary. This is consistent with
FAB 2018–02, which applied to
investment advice fiduciaries. For
clarity, Section I(c)(3) cites to the
Department’s five-part test as the
governing authority for status as an
investment advice fiduciary.
Exemption Conditions
Section II of the proposal sets forth
the general conditions that would be
included in the exemption. Section III
establishes the eligibility requirements.
Section IV would require parties to
maintain records to demonstrate
compliance with the exemption. Section
V includes the defined terms used in the
exemption. These sections are discussed
below. In order to avoid a prohibited
transaction, the Financial Institution
and Investment Professional would have
to comply with all of the conditions of
the exemption, and could not waive or
disclaim compliance with any of the
conditions. Similarly, a Retirement
Investor could not agree to waive any of
the conditions.
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Investment Advice Arrangement
(Section II)
Section II sets forth conditions that
would govern the Financial Institution’s
and Investment Professionals’ provision
of investment advice. As discussed in
greater detail below, Section II(a) would
require Financial Institutions and
Investment Professionals to comply
with the Impartial Conduct Standards
by providing advice that is in
Retirement Investors’ best interest,
charging only reasonable compensation,
and making no materially misleading
statements about the investment
transaction and other relevant matters.
The Impartial Conduct Standards would
further require the Financial Institution
and Investment Professional to seek to
obtain the best execution of the
investment transaction reasonably
available under the circumstances, as
required by the federal securities laws.
Section II(b) would require Financial
Institutions, prior to engaging in a
transaction pursuant to the exemption,
to provide a written disclosure to the
Retirement Investor acknowledging that
the Financial Institution and its
Investment Professionals are fiduciaries
under ERISA and the Code, as
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applicable.49 The disclosure also would
be required to provide a written
description, accurate in all material
respects regarding the services to be
provided and the Financial Institution’s
and Investment Professional’s material
conflicts of interest. Under Section II(c),
the Financial Institution would be
required to establish, maintain and
enforce written policies and procedures
prudently designed to ensure that the
Financial Institution and its Investment
Professionals comply with the Impartial
Conduct Standards. Section II(d) would
require Financial Institutions to conduct
an annual retrospective review.
Best Interest Standard
As defined in Section V(a), the
proposed best interest standard would
be satisfied if investment advice
‘‘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
Retirement Investor, and does not place
the financial or other interest of the
Investment Professional, Financial
Institution or any affiliate, related entity
or other party ahead of the interests of
the Retirement Investor, or subordinate
the Retirement Investor’s interests to
their own.’’
This proposed best interest standard
is based on longstanding concepts
derived from ERISA and the high
fiduciary standards developed under the
common law of trusts, and is intended
to comprise objective standards of care
and undivided loyalty, consistent with
the requirements of ERISA section
404.50 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
interests, and accordingly are well49 As noted above, the Department does not
intend the exemption to expand Retirement
Investors’ ability, such as by requiring contracts
and/or warranty provisions, to enforce their rights
in court or create any new legal claims above and
beyond those expressly authorized in ERISA.
Neither does the Department believe the exemption
would create any such expansion.
50 Cf. also Code section 4975(f)(5), which defines
‘‘correction’’ with respect to prohibited transactions
as placing a Plan or IRA in a financial position not
worse that it would have been in if the person had
acted ‘‘under the highest fiduciary standards.’’
While the Code does not expressly impose a duty
of loyalty on fiduciaries, the best interest standard
proposed here is intended to ensure adherence to
the ‘‘highest fiduciary standards’’ when a fiduciary
advises a Plan or IRA owner under the Code.
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suited to the problems posed by
conflicted investment advice.
The proposal’s standard of care is an
objective standard that would require
the Financial Institution and Investment
Professional to investigate and evaluate
investments, provide advice, and
exercise sound judgment in the same
way that knowledgeable and impartial
professionals would.51 Thus, an
Investment Professional’s and Financial
Institution’s advice would be measured
against that of a prudent Investment
Professional. As indicated in the text,
the standard of care is measured at the
time the advice is provided, and not in
hindsight.52 The standard would not
measure compliance by reference to
how investments subsequently
performed or turn Financial Institutions
and Investment Professionals into
guarantors of investment performance;
rather, the appropriate measure is
whether the Investment Professional
gave advice that was prudent and in the
best interest of the Retirement Investor
at the time the advice is provided.
The proposal articulates the best
interest standard as the Financial
Institutions’ and Investment
Professionals’ duty to ‘‘not place the
financial or other interest of the
Investment Professional, Financial
Institution or any affiliate, related entity
or other party ahead of the interests of
the Retirement Investor, or subordinate
the Retirement Investor’s interests to
their own.’’ The standard is to be
interpreted and applied consistent with
the standard set forth in the SEC’s
Regulation Best Interest 53 and the SEC’s
51 See Regulation Best Interest Care Obligation, 17
CFR 240.15l–1(a)(2)(ii); Regulation Best Interest
Release, 84 FR at 33321 (Under the Care Obligation,
‘‘[t]he broker-dealer must understand potential
risks, rewards, and costs associated with the
recommendation.’’); id., at 33326 (‘‘We are adopting
the Care Obligation largely as proposed; however,
we are expressly requiring that a broker-dealer
understand and consider the potential costs
associated with its recommendation, and have a
reasonable basis to believe that the recommendation
does not place the financial or other interest of the
broker-dealer ahead of the interest of the retail
customer.’’); id. at 33376 & n. 598 (discussing the
Care Obligation in the context of complex or risky
securities and investment strategies; citing FINRA
Regulatory Notice 17–32 as explaining that ‘‘[t]he
level of reasonable diligence that is required will
rise with the complexity and risks associated with
the security or strategy. With regard to a complex
product such as a volatility-linked [Exchange
Traded Product], an associated person should be
capable of explaining, at a minimum, the product’s
main features and associated risks.’’).
52 See Donovan v. Mazzola, 716 F.2d 1226, 1232
(9th Cir. 1983).
53 Regulation Best Interest’s best interest
obligation provides that a ‘‘broker, dealer, or a
natural person who is an associated person of a
broker or dealer, when making a recommendation
of any securities transaction or investment strategy
involving securities (including account
recommendations) to a retail customer, shall act in
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interpretation regarding the conduct
standard for registered investment
advisers.54 55
This best interest standard would
allow Investment Professionals and
Financial Institutions to provide
investment advice despite having a
financial or other interest in the
transaction, so long as they do not place
the interests ahead of the interests of the
Retirement Investor, or subordinate the
Retirement Investor’s interests to their
own. For example, in choosing between
two investments equally available to the
investor, it would not be permissible for
the Investment Professional to advise
investing in the one that is worse for the
Retirement Investor because it is better
for the Investment Professional’s or the
Financial Institution’s bottom line.
Because the standard does not forbid the
Financial Institution or Investment
Professional from having an interest in
the transaction this standard would not
foreclose the Investment Professional
and Financial Institution from being
paid, nor would it foreclose investment
advice on proprietary products or
investments that generate third party
payments.
The best interest standard in this
proposal would not impose an
unattainable obligation on Investment
Professionals and Financial Institutions
to somehow identify the single ‘‘best’’
investment for the Retirement Investor
out of all the investments in the national
or international marketplace, assuming
such advice were even possible at the
time of the transaction. The obligation
under the best interest standard would
be to give advice that adheres to
professional standards of prudence, and
that does not place the interests of the
the best interest of the retail customer at the time
the recommendation is made, without placing the
financial or other interest of the broker, dealer, or
natural person who is an associated person of a
broker or dealer making the recommendation ahead
of the interest of the retail customer.’’ 17 CFR
240.15l-1(a)(1).
54 ‘‘An investment adviser’s fiduciary duty under
the Advisers Act comprises a duty of care and a
duty of loyalty. This fiduciary duty requires an
adviser ‘to adopt the principal’s goals, objectives, or
ends.’ This means the adviser must, at all times,
serve the best interest of its client and not
subordinate its client’s interest to its own. In other
words, the investment adviser cannot place its own
interests ahead of the interests of its client.’’ SEC
Fiduciary Interpretation, 84 FR at 33671(citations
omitted).
55 The NAIC’s updated Suitability in Annuity
Transactions Model Regulation includes a safe
harbor for recommendations made by financial
professionals that are ERISA and Code fiduciaries
in compliance with the duties, obligations,
prohibitions and all other requirements attendant to
such status under ERISA and the Code. NAIC
Suitability in Annuity Transactions Model
Regulation, Spring 2020, Section 6.E.(5)(c),
available at https://www.naic.org/store/free/MDL275.pdf.
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Investment Professional, Financial
Institution, or other party ahead of the
Retirement Investor’s financial interests,
or subordinate the Retirement Investor’s
interests to those of the Investment
Professional or Financial Institution.
Neither the best interest standard nor
any other condition of the exemption
would establish a monitoring
requirement for Financial Institutions or
Investment Professionals; the parties
can, of course, establish a monitoring
obligation by agreement, arrangement,
or understanding. Under Section II(b),
discussed below, Financial Institutions
would, however, be required to disclose
which services they will provide.
Moreover, Financial Institutions should
carefully consider whether certain
investments can be prudently
recommended to the individual
Retirement Investor in the first place
without ongoing monitoring of the
investment. Investments that possess
unusual complexity and risk, for
example, may require ongoing
monitoring to protect the investor’s
interests. An Investment Professional
may be unable to satisfy the exemption’s
best interest standard with respect to
such investments without a mechanism
in place for monitoring. The added cost
of monitoring such investments should
also be considered by the Financial
Institution and Investment Professional
in determining whether the
recommended investments are in the
Retirement Investor’s best interest. The
Department requests comments on this
best interest standard and whether
additional examples would be useful.
Reasonable Compensation
General
Section II(a)(2) of the exemption
would establish a reasonable
compensation standard. Compensation
received, directly or indirectly, by the
Financial Institution, Investment
Professional, and their affiliates and
related entities for their services would
not be permitted to exceed reasonable
compensation 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 has been long recognized
under ERISA and the Code. ERISA
section 408(b)(2) and Code section
4975(d)(2) expressly require all types of
services arrangements involving Plans
and IRAs to result in no more than
reasonable compensation to the service
provider. Investment Professionals and
Financial Institutions—as service
providers—have long been subject to
this requirement, regardless of their
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fiduciary status. The reasonable
compensation standard requires that
compensation not be excessive, as
measured by the market value of the
particular services, rights, and benefits
the Investment Professional and
Financial Institution are delivering to
the Retirement Investor. Given the
conflicts of interest associated with the
commissions and other payments that
would be covered by the exemption,
and the potential for self-dealing, it is
particularly important that Investment
Professionals and Financial Institutions
adhere to these statutory standards,
which are rooted in common law
principles.
In general, the reasonableness of fees
will depend on the particular facts and
circumstances at the time of the
recommendation. Several factors inform
whether compensation is reasonable,
including the market price of service(s)
provided and/or 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. Under the
exemption, the Financial Institution and
Investment Professional would not have
to recommend the transaction that is the
lowest cost or that generates the lowest
fees without regard to other relevant
factors. Recommendations of the
‘‘lowest cost’’ security or investment
strategy, without consideration of other
factors, could in fact violate the
exemption.
The reasonable compensation
standard would apply to all transactions
under the exemption, including
investment products that bundle
together services and investment
guarantees or other benefits, such as
annuities. In assessing the
reasonableness of compensation in
connection with these products, it is
appropriate to consider the value of the
guarantees and benefits as well as the
value of the services. 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). The Department will
provide additional guidance if
necessary.
Best Execution
Section II(a)(2)(B) of the exemption
would require that, as required by the
federal securities laws, the Financial
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Institution and Investment Professional
seek to obtain the best execution of the
investment transaction reasonably
available under the circumstances.
Financial Institutions and Investment
Professionals subject to federal
securities laws such as the Securities
Act of 1933, the Securities Exchange Act
of 1934, and the Investment Advisers
Act of 1940, and rules adopted by
FINRA and the Municipal Securities
Rulemaking Board (MSRB), are
obligated to a longstanding duty of best
execution. As described recently by the
SEC, ‘‘[a] broker-dealer’s duty of best
execution requires a broker-dealer to
seek to execute customers’ trades at the
most favorable terms reasonably
available under the circumstances.’’ 56
This condition complements the
reasonable compensation standard set
forth in ERISA and the Code.
The Department would apply the best
execution requirement consistent with
the federal securities laws. Financial
Institutions that are FINRA members
would satisfy this subsection if they
comply with the standards in FINRA
rules 2121 (Fair Prices and
Commissions) and 5310 (Best Execution
and Interpositioning), or any successor
rules in effect at the time of the
transaction, as interpreted by FINRA.
Financial Institutions engaging in a
purchase or sale of a municipal bond
would satisfy this subsection if they
comply with the standards in MSRB
rules G–30 (Prices and Commissions)
and G–18 (Best Execution), or any
successor rules in effect at the time of
the transaction, as interpreted by MSRB.
Financial Institutions that are subject to
and comply with the fiduciary duty
under section 206 of the Investment
Advisers Act, which as described by the
SEC encompasses a duty to seek best
execution, would satisfy this
subsection.57
Misleading Statements
Section II(a)(3) would require that
statements by the Financial Institution
and its Investment Professionals to the
Retirement Investor about the
recommended transaction and other
relevant matters are not materially
misleading at the time they are made.
Other relevant matters would include
fees and compensation, material
conflicts of interest, and any other fact
that could reasonably be expected to
affect the Retirement Investor’s
investment decisions. For example, the
Department would consider it
56 Regulation Best Interest Release, 84 FR at
33373, note 565.
57 SEC Fiduciary Interpretation, 84 FR at 33674–
75 (Section II.B.2 ‘‘Duty to Seek Best Execution’’).
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materially misleading for the Financial
Institution or Investment Professional to
include any exculpatory clauses or
indemnification provisions in an
arrangement with a Retirement Investor
that are prohibited by applicable law.58
Retirement Investors are clearly best
served by statements and
representations free from material
misstatements and omissions. Financial
Institutions and Investment
Professionals best avoid liability—and
best promote the interests of Retirement
Investors—by ensuring that accurate
communications are a consistent
standard in all their interactions with
their customers.
Disclosure—Section II(b)
Section II(b) of the exemption would
require the Financial Institution to
provide certain written disclosures to
the Retirement Investor, prior to
engaging in any transactions pursuant to
the exemption. The Financial Institution
must acknowledge, in writing, that the
Financial Institution and its Investment
Professionals are fiduciaries under
ERISA and the Code, as applicable, with
respect to any fiduciary investment
advice provided by the Financial
Institution or Investment Professional to
the Retirement Investor. The Financial
Institution must provide a written
description of the services to be
provided and material conflicts of
interest arising out of the services and
any recommended investment
transaction. The description must be
accurate in all material respects.
The disclosure obligations in this
proposal are designed to protect
Retirement Investors by enhancing the
quality of information they receive in
connection with fiduciary investment
advice. The disclosures should be in
plain English, taking into consideration
Retirement Investors’ level of financial
experience. The requirement can be
satisfied through any disclosure, or
combination of disclosures, required to
be provided by other regulators so long
as the disclosure required by Section
II(b) is included.
The proposed disclosures are
designed to ensure that the fiduciary
nature of the relationship is clear to the
Financial Institution and Investment
58 See, e.g., ERISA section 410 and see also ERISA
Interpretive Bulletin 75–4—Indemnification of
fiduciaries under ERISA § 410(a). (‘‘The Department
of Labor interprets section 410(a) as rendering void
any arrangement for indemnification of a fiduciary
of an employee benefit plan by the plan. Such an
arrangement would have the same result as an
exculpatory clause, in that it would, in effect,
relieve the fiduciary of responsibility and liability
to the plan by abrogating the plan’s right to recovery
from the fiduciary for breaches of fiduciary
obligations.’’)
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Professional, as well as the Retirement
Investor, at the time of the investment
transaction. The Department does not
intend the fiduciary acknowledgment or
any of the disclosure obligations to
create a private right of action as
between a Financial Institution or
Investment Professional and a
Retirement Investor and it does not
believe the exemption would do so.59
As noted above, ERISA section 502(a)
provides a cause of action for fiduciary
breaches and prohibited transactions
with respect to ERISA-covered Plans
(but not IRAs). Code section 4975
imposes a tax on disqualified persons
participating in a prohibited transaction
involving Plans and IRAs (other than a
fiduciary acting only as such). These are
the sole remedies for engaging in nonexempt prohibited transactions.
The description of the services to be
provided and material conflicts of
interest is necessary to ensure
Retirement Investors receive
information to assess the conflicts and
compensation structures. The approach
taken in the proposal is principles-based
and meant to provide the flexibility
necessary to apply to a wide variety of
business models and practices. The
proposal does not require specific
disclosures to be tailored for each
Retirement Investor or each transaction
as long as a compliant disclosure is
provided before engaging in the
particular transaction for which the
exemption is sought. The Department
requests comments on the disclosure
requirements. In particular, the
Department seeks comment on whether
the written acknowledgment of
fiduciary status should be accompanied
by a disclosure of the fiduciary’s
obligations under the exemption to
provide advice in accordance with the
Impartial Conduct Standard. The
Department also requests comment on
whether the Department should instead
require this disclosure of Financial
Institutions’ and Investment
Professionals’ obligations under the
Impartial Conduct Standards as an
alternative to requiring written
disclosure of their fiduciary status.
Policies and Procedures—Section II(c)
General
Section II(c)(1) of the proposal would
establish an overarching requirement
59 In Chamber of Commerce of the United States
v. U.S. Department of Labor, supra note 5, the U.S.
Court of Appeals for the 5th Circuit found that the
Department did not have authority to include
certain contract requirements in the new
exemptions granted as part of the 2016 fiduciary
rulemaking. The Department is mindful of this
holding and has not included any contract
requirement in this proposal.
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that Financial Institutions establish,
maintain and enforce written policies
and procedures prudently designed to
ensure that the Financial Institution and
its Investment Professionals comply
with the Impartial Conduct Standards.
Under Section II(c)(2), Financial
Institutions’ policies and procedures
would be required to mitigate conflicts
of interest to the extent that the policies
and procedures, and the Financial
Institution’s incentive practices, when
viewed as a whole, are prudently
designed to avoid misalignment of the
interests of the Financial Institution and
Investment Professionals and the
interests of Retirement Investors. In
accordance with this standard, a
reasonable person reviewing the
Financial Institution’s incentive
practices, policies, and procedures
would conclude that the policies do not
give Investment Professionals an
incentive to violate the Impartial
Conduct Standards, but rather are
reasonably designed to promote
compliance with the standards.
As defined in the proposal, a conflict
of interest is ‘‘an interest that might
incline a Financial Institution or
Investment Professional—consciously or
unconsciously—to make a
recommendation that is not in the Best
Interest of the Retirement Investor’’ 60
Conflict mitigation is a critical
condition of the exemption, and is an
important factor for the Department to
make the findings under ERISA section
408(a) and Code section 4975(d)(2), that
the exemption is in the interests of, and
protective of, Retirement Investors. The
requirement to avoid misalignment
means, for example, that Financial
Institutions’ policies and procedures
would be required to be prudently
designed to protect Retirement Investors
from recommendations to make
excessive trades, or to buy investment
products, annuities, or riders that are
not in the investor’s best interest or that
allocate excessive amounts to illiquid or
risky investments.
Section II(c)(3) of the exemption
would establish specific documentation
requirements for recommendations to
roll over Plan or IRA assets to another
Plan or IRA and to change from one type
of account to another (e.g., from a
commission-based account to a feebased account). Financial Institutions
making these recommendations would
be required to document the specific
reason or reasons why the
recommendation was considered to be
60 This definition is consistent with the concept
of a conflict of interest in the SEC’s rulemaking.
Regulation Best Interest definition of Conflict of
Interest, 17 CFR 240.15l–1(b)(3); SEC Fiduciary
Interpretation, 84 FR at 33671.
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in the best interest of the Retirement
Investor. The Department requests
comments on whether additional
specific documentation requirements
would be appropriate.
To comply with the conditions in
Section II(c), Financial Institutions
would identify and carefully focus on
the particular aspects of their business
model that may create incentives that
are misaligned with the interests of
Retirement Investors. If, for example, a
Financial Institution anticipates that
conflicts of interest in its business
model will center on advice to roll over
Plan assets, and after the rollover, the
Financial Institution and Investment
Professional will be compensated on a
level-fee basis, the Financial
Institution’s policies and procedures
should focus on the rollover or
distribution recommendation. The
proposed requirement in Section II(c)(3)
to document the reason for rollover and
account recommendations supports
compliance with the Impartial Conduct
Standards in this context.61
On the other hand, if a Financial
Institution intends to receive
transaction-based third party
compensation, and compensate
Investment Professionals based on
transactions that occur in a Retirement
Investor’s accounts, such as through
commissions, the Financial Institution’s
policies and procedures would also
address the incentives created by these
compensation arrangements. Financial
Institutions that provide advice
regarding proprietary products or from
limited menus of products would
consider the conflicts of interest these
arrangements create. Approaches to
these conflicts of interest are discussed
in more detail below.
Advice To Roll Over Plan or IRA Assets
Rollover recommendations are a
primary concern of the Department, as
Financial Institutions and Investment
Professionals may have a strong
economic incentive to recommend that
investors roll over assets into one of
their Institution’s IRAs, whether from a
Plan or from an IRA account at another
Financial Institution, or even between
different account types. The decision to
roll over assets from an ERISA-covered
61 In general, after the rollover, the ongoing
receipt of compensation based on a fixed percentage
of the value of assets under management does not
require a prohibited transaction exemption.
However, the Department cautions that certain
practices such as ‘‘reverse churning’’ (i.e.
recommending a fee-based account to an investor
with low trading activity and no need for ongoing
monitoring or advice) or recommending holding an
asset solely to generate more fees may be prohibited
transactions that would not satisfy the Impartial
Conduct Standards.
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Plan to an IRA may be one of the most
important financial decisions that
Retirement Investors make, as it may
have a long-term impact on their
retirement security.
The Department believes the
requirement in Section II(c)(3) to
document the reasons that advice to
take a distribution or to roll over Plan
or IRA assets were in the Retirement
Investor’s best interest will serve an
important role in protecting Retirement
Investors during this significant
decision. The requirement is designed
to ensure that Investment Professionals
take the time to form a prudent
recommendation, and that a record is
available for later review.
For purposes of compliance with the
exemption, a prudent recommendation
to roll over from an ERISA-covered Plan
to an IRA would necessarily include
consideration and documentation of the
following: The Retirement Investor’s
alternatives to a rollover, including
leaving the money in his or her current
employer’s Plan, if permitted, and
selecting different investment options;
the fees and expenses associated with
both the Plan and the IRA; whether the
employer pays for some or all of the
Plan’s administrative expenses; and the
different levels of services and
investments available under the Plan
and the IRA. For rollovers from another
IRA or changes from a commissionbased account to a fee-based
arrangement, a prudent
recommendation would include
consideration and documentation of the
services that would be provided under
the new arrangement.
In evaluating a potential rollover from
an ERISA-covered Plan, the Investment
Professional and Financial Institution
should make diligent and prudent
efforts to obtain information about the
existing Plan and the participant’s
interests in it. If the Retirement Investor
is unwilling to provide the information,
even after a full explanation of its
significance, and the information is not
otherwise readily available, the
Investment Professional should make a
reasonable estimation of expenses, asset
values, risk, and returns based on
publicly available information and
explain the assumptions used and their
limitations to the Retirement Investor.
The Department requests comment on
whether there are any other actions the
Department should or could take with
respect to disclosure or reporting that
would promote prudent rollover advice
without overlapping existing regulatory
requirements.
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Commission-Based Compensation
Arrangements
Financial Institutions that compensate
Investment Professionals through
transaction-based payments and
incentives would need to consider how
to minimize the impact of these
compensation incentives on fiduciary
investment advice to Retirement
Investors, so that the Financial
Institution would be able to meet the
exemption’s standard of conflict
mitigation set forth in proposed Section
II(c)(2). As noted above, this standard
would require the policies and
procedures, and the Financial
Institution’s incentive practices, when
viewed as a whole, to be prudently
designed to avoid misalignment of the
interests of the Financial Institution and
Investment Professionals and the
interests of Retirement Investors.
For commission-based compensation
arrangements, Financial Institutions
would be encouraged to focus on both
financial incentives to Investment
Professionals and supervisory oversight
of investment advice. These two aspects
of the Financial Institution’s policies
and procedures would complement
each other, and Financial Institutions
would retain the flexibility, based on
the characteristics of their businesses, to
adjust the stringency of each component
provided that the exemption’s overall
standards would be satisfied. Financial
Institutions that significantly mitigate
commission-based compensation
incentives would have less need to
rigorously oversee Investment
Professionals. Conversely, Financial
Institutions that have significant
variation in compensation across
different investment products would
need to implement more stringent
supervisory oversight.
In developing compliance structures,
the Department envisions that Financial
Institutions would implement conflict
mitigation strategies identified by the
Financial Institutions’ other regulators.
The following non-exhaustive examples
of practices identified as options by the
SEC could be implemented by Financial
Institutions in compensating Investment
Professionals: (i) Avoiding
compensation thresholds that
disproportionately increase
compensation through incremental
increases in sales; (ii) Minimizing
compensation incentives for employees
to favor one type of account over
another; or to favor one type of product
over another, proprietary or preferred
provider products, or comparable
products sold on a principal basis, for
example, by establishing differential
compensation based on neutral factors;
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(iii) Eliminating compensation
incentives within comparable product
lines by, for example, capping the credit
that an associated person may receive
across mutual funds or other
comparable products across providers;
(iv) Implementing supervisory
procedures to monitor
recommendations that are: near
compensation thresholds; near
thresholds for firm recognition; involve
higher compensating products,
proprietary products or transactions in a
principal capacity; or, involve the
rollover or transfer of assets from one
type of account to another (such as
recommendations to roll over or transfer
assets in an ERISA account to an IRA)
or from one product class to another; (v)
Adjusting compensation for associated
persons who fail to adequately manage
conflicts of interest; and (vi) Limiting
the types of retail customer to whom a
product, transaction or strategy may be
recommended.62
Financial Institutions also should
consider minimizing incentives at the
Financial Institution level. Firms could
establish or enhance the review process
for investment products that may be
recommended to Retirement Investors.
This process could include procedures
for identifying and mitigating conflicts
of interest associated with the product
and declining to recommend a product
if the Financial Institution cannot
effectively mitigate associated conflicts
of interest.
Insurance companies and insurance
agents that are investment advice
fiduciaries relying on the exemption
would be encouraged to adopt strategies
similar to those identified above to
address conflicts of interest. Insurance
companies could also supervise
independent insurance agents who
provide investment advice on their
products through the mechanisms noted
above. To comply with the exemption,
the insurer could adopt and implement
supervisory and review mechanisms
and avoid improper incentives that
preferentially push the products, riders,
and annuity features that might
incentivize Investment Professionals to
provide investment advice to
Retirement Investors that does not meet
the Impartial Conduct Standards.
Insurance companies could implement
procedures to review annuity sales to
Retirement Investors to ensure that they
were made in satisfaction of the
Impartial Conduct Standards, much as
they may already be required to review
62 Regulation Best Interest Release, 84 FR at
33392.
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annuity sales to ensure compliance with
state-law suitability requirements.63
In this regard, insurance company
Financial Institutions would be
responsible only for an Investment
Professional’s recommendation and sale
of products offered to Retirement
Investors by the insurance company in
conjunction with fiduciary investment
advice, and not unrelated and
unaffiliated insurers.64 Insurance
companies could implement the
policies and procedures by monitoring
market prices and benchmarks for their
products and services, and remaining
attentive to any financial inducements
they offer to independent agents that
could result in a misalignment of the
interests of the agent and his or her
Retirement Investor customer. Insurers
could also create a system of oversight
and compliance by contracting with an
IMO to implement policies and
procedures designed to ensure that all of
the agents associated with the
intermediary adhere to the conditions of
this exemption. Thus, for example, as
one possible approach, the intermediary
could eliminate compensation
incentives across all the insurance
63 Cf. NAIC Suitability in Annuity Transactions
Model Regulation, Spring 2020, Section 6.C.(2)(d)
(‘‘The insurer shall establish and maintain
procedures for the review of each recommendation
prior to issuance of an annuity that are designed to
ensure that there is a reasonable basis to determine
that the recommended annuity would effectively
address the particular consumer’s financial
situation, insurance needs and financial objectives.
Such review procedures may apply a screening
system for the purpose of identifying selected
transactions for additional review and may be
accomplished electronically or through other means
including, but not limited to, physical review. Such
an electronic or other system may be designed to
require additional review only of those transactions
identified for additional review by the selection
criteria’’); and (e) (‘‘The insurer shall establish and
maintain reasonable procedures to detect
recommendations that are not in compliance with
subsections A, B, D and E. This may include, but
is not limited to, confirmation of the consumer’s
consumer profile information, systematic customer
surveys, producer and consumer interviews,
confirmation letters, producer statements or
attestations and programs of internal monitoring.
Nothing in this subparagraph prevents an insurer
from complying with this subparagraph by applying
sampling procedures, or by confirming the
consumer profile information or other required
information under this section after issuance or
delivery of the annuity’’), available at https://
www.naic.org/store/free/MDL-275.pdf. The prior
version of the model regulation, which was adopted
in some form by a number of states, also included
similar provisions requiring systems to supervise
recommendations. See Annuity Suitability (A)
Working Group Exposure Draft, Adopted by the
Committee Dec. 30, 2019, available at https://
www.naic.org/documents/committees_mo275.pdf.
(comparing 2020 version with prior version).
64 Cf. Id., Section 6.C.(4) (‘‘An insurer is not
required to include in its system of supervision: (a)
A producer’s recommendations to consumers of
products other than the annuities offered by the
insurer’’), available at https://www.naic.org/store/
free/MDL-275.pdf.
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companies that work with the
intermediary, assisting each of the
insurance companies with their
independent obligations under the
exemption. This might involve the
intermediary’s review of documentation
prepared by insurance agents to comply
with the exemption, as may be required
by the insurance company, or the use of
third-party industry comparisons
available in the marketplace to help
independent insurance agents
recommend products that are prudent
for the Retirement Investors they
advise.65
The Department notes that regulators
in the securities and insurance industry
have adopted provisions requiring
elimination of sales contests and similar
incentives such as sales quotas,
bonuses, and non-cash compensation
that are based on sales of certain
investments within a limited period of
time.66 The Department agrees that
these practices create incentives to
recommend products that are not in a
Retirement Investor’s best interest that
cannot be effectively mitigated.
Therefore, Financial Institutions’
policies and procedures would not be
prudently designed to avoid a
misalignment of interests between
Investment Professionals and
Retirement Investors if they establish or
permit these practices. To satisfy the
exemption’s standard of mitigation,
Financial Institutions would be required
to carefully consider performance and
personnel actions and practices that
could encourage violation of the
Impartial Conduct Standards.
The Department notes Financial
Institutions complying with the
exemption would need to review their
policies and procedures periodically
and reasonably revise them as necessary
to ensure that the policies and
procedures continue to satisfy the
conditions of this exemption. In
particular, the exemption would require
ongoing vigilance as to the impact of
conflicts of interest on the provision of
fiduciary investment advice to
Retirement Investors. As a matter of
prudence, Financial Institutions should
address any deficiencies in their
policies and procedures if, in fact, the
policies and procedures are not
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65 None
of the conditions of this proposal are
intended to categorically bar the provision of
employee benefits to insurance company statutory
employees, despite the practice of basing eligibility
for such benefits on sales of proprietary products
of the insurance company. See Internal Revenue
Code section 3121.
66 Regulation Best Interest Release, 84 FR at
33394–97; NAIC Suitability in Annuity
Transactions Model Regulation, Spring 2020,
Section 6.C.(2)(h), available at https://
www.naic.org/store/free/MDL-275.pdf.
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achieving their intended goal of
ensuring compliance with the
exemption and the provision of advice
that satisfies the Impartial Conduct
Standards. The Department seeks
comment on the proposed policy and
procedure requirements, including
whether this principle-based method is
sufficiently protective of participants
and beneficiaries.
Proprietary Products and Limited
Menus of Investment Products
It is important to note that the
Department believes that the best
interest standard can be satisfied by
Financial Institutions and Investment
Professionals that provide investment
advice on proprietary products or on a
limited menu, including limitations to
proprietary products 67 and products
that generate third party payments.68
Product limitations can serve a
beneficial purpose by allowing brokerdealers and associated persons to
develop increased familiarity with the
products they recommend. At the same
time, limited menus, particularly if they
focus on proprietary products and
products that generate third party
payments, can result in heightened
conflicts of interest. Financial
Institutions and their affiliates may
receive more compensation than they
would for recommending other
products, and, as a result, Investment
Professionals’ and Financial
Institutions’ interests may be misaligned
with the interests of Retirement
Investors.
Financial Institutions and Investment
Professionals providing investment
advice on proprietary products or on a
limited menu would satisfy the standard
provided they give complete and
accurate disclosure of their material
conflicts of interest in connection with
such products or limitations and adopt
policies and procedures that are
prudently designed to prevent any
conflicts of interest from causing a
misalignment of the interests of the
Financial Institution and Investment
Professional with the interests of the
Retirement Investor. This would include
policies applicable to circumstances
where the Financial Institution or
67 Proprietary products include products that are
managed, issued or sponsored by the Financial
Institution or any of its affiliates.
68 Third party payments include sales charges
when not paid directly by the Plan or IRA; gross
dealer concessions; revenue sharing payments; 12b–
1 fees; distribution, solicitation or referral fees;
volume-based fees; fees for seminars and
educational programs; and any other compensation,
consideration or financial benefit provided to the
Financial Institution or an affiliate or related entity
by a third party as a result of a transaction involving
a Plan or IRA.
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40847
Investment Professional prudently
determines that its proprietary products
or limited menu do not offer Retirement
Investors an investment option in their
best interest when compared with other
investment alternatives available in the
marketplace. The Department envisions
that Financial Institutions complying
with the Impartial Conduct Standards
would carefully consider their product
offerings and form a reasonable
conclusion about whether the menu of
investment options would permit
Investment Professionals to provide
fiduciary investment advice to
Retirement Investors in accordance with
the Impartial Conduct Standards. The
exemption would be available if the
Financial Institution prudently
concludes that its offering of proprietary
products, or its limitations on
investment product offerings, in
conjunction with the policies and
procedures, would not cause a
misalignment of interests. Financial
Institutions and Investment
Professionals cannot use a limited menu
to justify making a recommendation that
does not meet the Impartial Conduct
Standards.
The Department seeks comment on
this analysis. Is this preamble guidance
sufficient or do commenters believe that
it is important for the exemption text to
specifically address proprietary
products and limited menus of
investment products? Should the
Department more specifically
incorporate provisions of Regulation
Best Interest in this respect? 69 Should
this exemption specify documentation
requirements reflecting the Financial
Institution’s analysis or conclusions
with respect to its adoption of a limited
menu or its recommendation of
proprietary products, and its ability to
comply with the conditions of this
exemption with respect to such
products or menus?
Retrospective Review—Section II(d)
Section II(d) of the proposal relates to
the Financial Institution’s oversight of
its compliance, and its Investment
Professionals’ compliance, with the
Impartial Conduct Standards and the
policies and procedures. While
mitigation of Financial Institutions’ and
Investment Professionals’ conflicts of
interest is critical, Financial Institutions
must also monitor Investment
Professionals’ conduct to detect advice
that does not adhere to the Impartial
69 See 17 CFR 240.15l–1(a)(2)(iii)(C) describing
policies and procedures addressing material
limitations placed on securities or investment
strategies.
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Conduct Standards or the Financial
Institution’s policies and procedures.
Under the proposal, Financial
Institutions would be required to
conduct a retrospective review, at least
annually, that is reasonably designed to
assist the Financial Institution in
detecting and preventing violations of,
and achieving compliance with, the
Impartial Conduct Standards and the
policies and procedures governing
compliance with the exemption. The
Department envisions that the review
would involve testing a sample of
transactions to determine compliance.
The methodology and results of the
retrospective review would be reduced
to a written report that is provided to
the Financial Institution’s chief
executive officer (or equivalent officer).
That officer would be required to certify
annually that:
(A) The officer has reviewed the
report of the retrospective review;
(B) The Financial Institution has in
place policies and procedures prudently
designed to achieve compliance with
the conditions of this exemption; and
(C) The Financial Institution has in
place a prudent process to modify such
policies and procedures as business,
regulatory and legislative changes and
events dictate, and to test the
effectiveness of such policies and
procedures on a periodic basis, the
timing and extent of which is
reasonably designed to ensure
continuing compliance with the
conditions of this exemption.
This retrospective review, report and
certification would be required to be
completed no later than six months
following the end of the period covered
by the review. The Financial Institution
would be required to retain the report
and supporting data for a period of six
years. If the Department, any other
federal or state regulator of the Financial
Institution, or any applicable selfregulatory organization, requests the
written report and supporting data
within those six years, the Financial
Institution would make the requested
documents available within 10 business
days of the request. The Department
believes that the requirement to provide
the written report within 10 business
days will ensure that Financial
Institutions diligently prepare their
reports each year, resulting in
meaningful protection of Retirement
Investors. The Department requests
comments about this process, including
regarding the timing and certified
information.
Financial Institutions can use the
results of the review to find more
effective ways to ensure that Investment
Professionals are providing investment
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advice in accordance with the Impartial
Conduct Standards, and to correct any
deficiencies in existing policies and
procedures. Requiring the chief
executive officer (or equivalent, i.e., the
most senior officer or executive in
charge of managing the Financial
Institution) to certify review of the
report is a means of creating
accountability for the review. This
would serve the purpose of ensuring
that more than one person determines
whether the Financial Institution is
complying with the conditions of the
exemption and avoiding non-exempt
prohibited transactions. If the chief
executive officer does not have the
experience or expertise to determine
whether to make the certification, he or
she would be expected to consult with
a knowledgeable compliance
professional to be able to do so. The
proposed retrospective review is based
on FINRA rules governing how brokerdealers supervise associated persons,70
adapted to focus on the conditions of
the exemption. The Department is aware
that other Financial Institutions are
subject to regulatory requirements to
review their policies and procedures; 71
however, for the reasons stated above,
the Department believes that the
specific certification requirement in the
proposal will serve to protect
Retirement Investors in the context of
conflicted investment advice
transactions.
Eligibility (Section III)
Section III of the proposal identifies
circumstances under which an
Investment Professional or Financial
Institution would not be eligible to rely
on the exemption. The grounds for
ineligibility would involve certain
criminal convictions or certain
egregious conduct with respect to
compliance with the exemption. The
proposed period of ineligibility would
be 10 years.
Criminal Convictions
An Investment Professional or
Financial Institution would become
ineligible upon the conviction of any
crime described in ERISA section 411
arising out of provision of advice to
Retirement Investors, except as
described below. The Department
includes crimes described in ERISA
section 411 for the proposal because
they are likely to directly contravene the
Investment Professional’s or Financial
Institution’s ability to maintain the high
standard of integrity, care, and
FINRA rules 3110, 3120, and 3130.
e.g., Rule 206(4)–7 under the Investment
Advisers Act of 1940.
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70 See
71 See
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undivided loyalty demanded by a
fiduciary’s position of trust and
confidence.
Ineligibility after a criminal
conviction described in the exemption
would be automatic for an Investment
Professional. However, Financial
Institutions with a criminal conviction
described in the exemption would be
permitted to submit a petition to the
Department and seek a determination
that continued reliance on the
exemption would not be contrary to the
purposes of the exemption. Petitions
would be required to be submitted
within 10 business days of the
conviction to the Director of the Office
of Exemption Determinations by email
at e-OED@dol.gov, or by certified mail at
Office of Exemption Determinations,
Employee Benefits Security
Administration, U.S. Department of
Labor, 200 Constitution Avenue NW,
Suite 400, Washington, DC 20210.
Following receipt of the petition, the
Department would provide the
Financial Institution with the
opportunity to be heard, in person or in
writing or both. Because of the 10business day timeframe for submitting a
petition, the Department would not
expect the Financial Institution to set
forth its entire position or argument in
its initial petition. The opportunity to be
heard in person would be limited to one
in-person conference unless the
Department determines in its sole
discretion to allow additional
conferences.
The Department’s determination as to
whether to grant the petition would be
based solely on its discretion. In
determining whether to grant the
petition, the Department will consider
the gravity of the offense; the
relationship between the conduct
underlying the conviction and the
Financial Institution’s system and
practices in its retirement investment
business as a whole; the degree to which
the underlying conduct concerned
individual misconduct, or, alternately,
corporate managers or policy; how
recent was the underlying lawsuit;
remedial measures taken by the
Financial Institution upon learning of
the underlying conduct; and such other
factors as the Department determines in
its discretion are reasonable in light of
the nature and purposes of the
exemption. The Department would
consider whether any extenuating
circumstances would indicate that the
Financial Institution should be able to
continue to rely on the exemption
despite the conviction. The standard for
the determination, as stated above,
would be that continued reliance on the
exemption would not be contrary to the
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purposes of the exemption.
Accordingly, the Department will focus
on the Financial Institution’s ability to
fulfil its obligations under the
exemption prudently and loyally, for
the protection of Retirement Investors.
The Department will provide a written
determination to the Financial
Institution that articulates the basis for
the determination. The Department
notes that the denial of a Financial
Institution’s petition will not
necessarily indicate that the Department
will not entertain a separate individual
exemption request submitted by the
same Financial Institution subject to
additional protective conditions.
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Conduct With Respect to Compliance
With the Exemption
An Investment Professional or
Financial Institution would become
ineligible upon the date of a written
ineligibility notice from the Director of
the Office of Exemption Determinations
that they (i) engaged in a systematic
pattern or practice of violating the
conditions of the exemption; (ii)
intentionally violated the conditions of
this exemption; or (iii) provided
materially misleading information to the
Department in connection with the
Investment Professional’s or Financial
Institution’s conduct under the
exemption. This type of conduct in
connection with exemption compliance
would indicate that the entity should
not be permitted to continue to rely on
the broad prohibited transaction relief
in the class exemption.
The proposal sets forth a process
governing the issuance of the written
ineligibility notice, as follows. Prior to
issuing a written ineligibility notice, the
Director of the Office of Exemption
Determinations would be required to
issue a written warning to the
Investment Professional or Financial
Institution, as applicable, identifying
specific conduct that could lead to
ineligibility, and providing a six-month
opportunity to cure. At the end of the
six-month period, if the Department
determined that the conduct persisted,
it would provide the Investment
Professional or Financial Institution
with the opportunity to be heard, in
person or in writing, before the Director
of the Office of Exemption
Determinations issued the written
ineligibility notice. The written
ineligibility notice would articulate the
basis for the determination that the
Investment Professional or Financial
Institution engaged in conduct
warranting ineligibility.
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Period and Scope of Ineligibility
The proposed period of ineligibility
would be 10 years; however, the
ineligibility provisions would apply
differently to Investment Professionals
and Financial Institutions. An
Investment Professional convicted of a
crime would become ineligible
immediately upon the date the
Investment Professional is convicted by
a trial court, regardless of whether that
judgment remains under appeal, or
upon the date of the written ineligibility
notice from the Office of Exemption
Determinations.
A Financial Institution’s ineligibility
would be triggered by its own
conviction or receipt of a written
ineligibility notice, or that of another
Financial Institution in the same
Control Group. A Financial Institution
is in a Control Group with another
Financial Institution if, directly or
indirectly, the Financial Institution
owns at least 80 percent of, is at least
80 percent owned by, or shares an 80
percent or more owner with, the other
Financial Institution. For purposes of
this provision, if the Financial
Institutions are not corporations,
ownership is defined to include
interests in the Financial Institution
such as profits interest or capital
interests.
The Department is including Control
Group Financial Institutions to ensure
that a Financial Institution facing
ineligibility for its actions affecting
Retirement Investors cannot simply
transfer its fiduciary investment advice
business to another Financial Institution
that is closely related and also provides
fiduciary investment advice to
Retirement Investors, thus avoiding the
ineligibility provisions entirely. The
proposed definition is narrowly tailored
to cover only other investment advice
fiduciaries that share significant
ownership. A Financial Institution
could not become ineligible based on
the actions of an entity engaged in
unrelated services that happened to
share a small amount of common
ownership. The 80 percent threshold is
consistent with the Code’s rules for
determining when employees of
multiple corporations should be treated
as employed by the same employer.72
The Department requests comments on
this definition. Is 80 percent an
appropriate threshold? Are there
alternative ways of defining ownership
that would be easily applicable to all
types of Financial Institutions?
Unlike Investment Professionals,
Financial Institutions would have a one-
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72 See
Code section 414(b).
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40849
year winding down period before
becoming ineligible to rely on the
exemption, as long as they complied
with the exemption’s other conditions
during that year. The winding down
period begins on the date of the trial
court’s judgment, regardless of whether
that judgment remains under appeal.
Financial Institutions that timely submit
a petition regarding the conviction
would become ineligible as of the date
of a written notice of denial from the
Office of Exemption Determinations.
Financial Institutions that become
ineligible due to conduct with respect to
exemption compliance would become
ineligible as of the date of the written
ineligibility notice from the Office of
Exemption Determinations.
Financial Institutions or Investment
Professionals that become ineligible to
rely on this exemption may rely on a
statutory prohibited transaction
exemption if one is available or may
seek an individual prohibited
transaction exemption from the
Department. The Department
encourages any Financial Institution or
Investment Professional facing
allegations that could result in
ineligibility to begin the application
process. If the applicant becomes
ineligible and the Department has not
granted a final individual exemption,
the Department will consider granting
retroactive relief, consistent with its
policy as set forth in 29 CFR 2570.35(d).
Retroactive exemptions may require
additional prospective compliance.
The Department seeks comment on
the proposal’s eligibility provisions. Are
the crimes included in the proposal
properly tailored to identify Investment
Professionals and Financial Institutions
that should no longer be eligible to rely
on the broad relief in the class
exemption? Is additional guidance
needed with respect to any aspect of the
ineligibility section to provide clarity to
Investment Professionals and Financial
Institutions?
Recordkeeping (Section IV)
Section IV would condition relief on
the Financial Institution maintaining
the records demonstrating compliance
with this exemption for six years. The
Department generally imposes a
recordkeeping requirement on
exemptions so that parties relying on an
exemption can demonstrate, and the
Department can verify, compliance with
the conditions of the exemption.
To demonstrate compliance with the
exemption, Financial Institutions would
be required to provide, among other
things, documentation of rollover
recommendations and their written
policies and procedures adopted
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pursuant to Section II(c). The
Department does not expect Financial
Institutions to document the reason for
every investment recommendation
made pursuant to the exemption.
However, documentation may be
especially important for
recommendations of particularly
complex products or recommendations
that might, on their face, appear
inconsistent with the best interest of a
Retirement Investor.
Section IV would require that the
records be made available, to the extent
permitted by law, to any authorized
employee of the Department; any
fiduciary of a Plan that engaged in an
investment transaction pursuant to this
exemption; any contributing employer
and any employee organization whose
members are covered by a Plan that
engaged in an investment transaction
pursuant to this exemption; or any
participant or beneficiary of a Plan, or
IRA owner that engaged in an
investment transaction pursuant to this
exemption.
The records should be made
reasonably available for examination at
their customary location during normal
business hours. Participants,
beneficiaries and IRA owners; Plan
fiduciaries; and contributing employers/
employee organizations should be able
to request only information applicable
to their own transactions, and not
privileged trade secrets or privileged
commercial or financial information of
the Financial Institution, or information
identifying other individuals. Should
the Financial Institution refuse to
disclose information on the basis that
the information is exempt from
disclosure, the Department expects that
the Financial Institution would provide
a written notice, within 30 days,
advising the requestor of the reasons for
the refusal and that the Department may
request such information.
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Regulatory Impact Analysis
Executive Orders 12866 and 13563
Statement
Executive Orders 12866 73 and
13563 74 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
73 Regulatory Planning and Review, 58 FR 51735
(Oct. 4, 1993).
74 Improving Regulation and Regulatory Review,
76 FR 3821 (Jan. 21, 2011).
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quantifying costs and benefits, reducing
costs, harmonizing rules, and promoting
flexibility.
Under Executive Order 12866,
‘‘significant’’ regulatory actions are
subject to review by the Office of
Management and Budget (OMB).
Section 3(f) of the Executive Order
defines a ‘‘significant regulatory action’’
as any regulatory action that is likely to
result in a rule that may:
(1) Have an annual effect on the
economy of $100 million or more or
adversely and materially affect 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’’);
(2) Create a serious inconsistency or
otherwise interfere with an action taken
or planned by another agency;
(3) Materially alter the budgetary
impacts of entitlement grants, user fees,
or loan programs or the rights and
obligations of recipients thereof; or
(4) Raise novel legal or policy issues
arising out of legal mandates, the
President’s priorities, or the principles
set forth in the Executive Order.
The Department anticipates that this
proposed exemption would be
economically significant within the
meaning of section 3(f)(1) of Executive
Order 12866. Therefore, the Department
provides the following assessment of the
potential benefits and costs associated
with this proposed exemption. In
accordance with Executive Order 12866,
this proposed exemption was reviewed
by OMB.
If the exemption is granted, it will be
transmitted to Congress and the
Comptroller General for review in
accordance with the Congressional
Review Act provisions of the Small
Business Regulatory Enforcement
Fairness Act of 1996 (5 U.S.C. 801 et
seq.).
Need for Regulatory Action
Following the United States Court of
Appeals for the Fifth Circuit decision to
vacate the Department’s 2016 fiduciary
rule and exemptions, the Department
issued the temporary enforcement
policy under FAB 2018–02 and
announced its intent to provide
additional guidance in the future. Since
then, as discussed earlier in this
preamble, the regulatory landscape has
changed as other regulators, including
the SEC, have adopted enhanced
conduct standards for financial services
professionals. These changes are
accordingly reflected in the baseline
that the Department applies when it
evaluates the benefits and costs
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associated with this proposed
exemption below.
At the same time, the share of total
Plan participation attributable to
participant-directed defined
contribution (DC) Plans continued to
grow. In 2017, 83 percent of DC Plan
participation was attributable to 401(k)
Plans, and 98 percent of 401(k) Plan
participants were responsible directing
some or all of their account
investments.75 Individual DC Plan
participants and IRA investors are
responsible for investing their
retirement savings and they are in need
of high quality, impartial advice from
financial service professionals in
making these investment decisions.
Given this backdrop, the Department
believes that it is appropriate to propose
an exemption to formalize the relief
provided in the FAB. The exemption
would provide Financial Institutions
and Investment Professionals broader,
more flexible prohibited transaction
relief than is currently available, while
safeguarding the interests of Retirement
Investors. Offering a permanent
exemption based on the FAB would
provide certainty to Financial
Institutions and Investment
Professionals that may currently be
relying on the temporary enforcement
policy.
Benefits
This proposed exemption would
generate several benefits. It would
provide Financial Institutions and
Investment Professionals with flexibility
to choose between the new exemption
or existing exemptions, depending on
their needs and business models. In this
regard, the proposed exemption would
help preserve different business models,
transaction arrangements, and products
that meet different needs in the market
place. This can, in turn, help preserve
wide availability of investment advice
arrangements and products for
Retirement Investors. Furthermore, the
exemption would provide certainty for
Financial Institutions and Investment
Professionals that opted to comply with
the enforcement policy announced in
the FAB to continue with that
compliance approach, and the
exemption would ensure advice that
satisfies the Impartial Conduct
Standards is widely available to
Retirement Investors without any
interruption.
75 Private Pension Plan Bulletin Historic Tables
and Graphs 1975–2017, Employee Benefits Security
Administration (Sep. 2018), https://www.dol.gov/
sites/dolgov/files/ebsa/researchers/statistics/
retirement-bulletins/private-pension-plan-bulletinhistorical-tables-and-graphs.pdf.
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Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 / Proposed Rules
As described above, the FAB
announced a temporary enforcement
policy that would apply until the
issuance of further guidance. Its
designation as ‘‘temporary’’
communicated its nature as a
transitional measure following the
vacatur of the Department’s 2016
rulemaking. Although the FAB remains
in place following this proposal, the
Department does not envision that the
FAB represents a permanent compliance
approach. This is due in part to the fact
that the FAB allows Financial
Institutions to avoid enforcement action
by the Department but it does not (and
cannot) provide relief from private
litigation.
In connection with the more
permanent relief it would provide, the
exemption would have more specific
conditions than the FAB, which
required only good faith compliance
with the Impartial Conduct Standards.
The conditions in the proposal are
designed to support the provision of
investment advice that meets the
Impartial Conduct Standards. For
example, the required policies and
procedures and retrospective review
inform Financial Institutions as to how
they should implement compliance
with the standards.
Some Financial Institutions may
consider whether to rely on the
Department’s existing exemptions rather
than adopt the specific conditions in the
new proposed exemption. The existing
exemptions generally rely on
disclosures as conditions. However, the
existing exemptions are also very
narrowly tailored in terms of the
transactions and types of compensation
arrangements that are covered as well as
the parties that may rely on the
exemption. For example, the existing
exemptions were never amended to
clearly cover the third party
compensation arrangements, such as
revenue sharing, that developed over
time. Investment advice fiduciaries
relying on some of the existing
exemptions would be limited to the
types of compensation that tend to be
more transparent to Retirement
Investors, such as commission
payments.
For a number of reasons, Financial
Institutions may decide to rely on the
new exemption, if it is finalized, instead
of the Department’s existing
exemptions. The proposed exemption
does not identify specific transactions or
limit the types of payments that are
covered, so Financial Institutions may
prefer this flexibility. Additionally,
Financial Institutions may determine
that there is a marketing advantage to
acknowledging their fiduciary status
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with respect to Retirement Investors, as
would be required by the new
exemption.
As the proposed exemption would
apply to multiple types of investment
advice transactions, it would potentially
allow Financial Institutions to rely on
one exemption for investment advice
transactions under a single set of
conditions. This approach may allow
Financial Institutions to streamline
compliance, as compared to relying on
multiple exemptions with multiple sets
of conditions, resulting in a lower
overall compliance burden for some
Financial Institutions. Retirement
Investors may benefit, in turn, if those
Financial Institutions pass their savings
on to them.
This proposed exemption’s alignment
with other regulatory conduct standards
could result in a reduction in overall
regulatory burden as well. As discussed
earlier in this preamble, the proposed
exemption was developed in
consideration of other regulatory
conduct standards. The Department
envisions that Financial Institutions and
Investment Professionals that have
already developed, or are in the process
of developing, compliance structures for
other regulators’ standards will be able
to experience regulatory efficiencies
through reliance on the new exemption.
As discussed above, the Department
believes that the proposed exemption
would provide significant protections
for Retirement Investors. The proposed
exemption would not expand
Retirement Investors’ ability, such as
through required contracts and warranty
provisions, to enforce their rights in
court or create any new legal claims
above and beyond those expressly
authorized in ERISA. Rather, the
proposed exemption relies in large
measure on Financial Institutions’
reasonable oversight of Investment
Professionals and their adoption of a
culture of compliance. Accordingly, in
addition to the Impartial Conduct
Standards, the exemption includes
conditions designed to support
investment advice that meets those
standards, such as the provisions
requiring written policies and
procedures, documentation of rollover
recommendations, and retrospective
review.
Finally, the proposal provides that
Financial Institutions and Investment
Professionals with certain criminal
convictions or that engage in egregious
conduct with respect to compliance
with the exemption would become
ineligible to rely on the exemption.
These factors would indicate that the
Financial Institution or Investment
Professional does not have the ability to
PO 00000
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40851
maintain the high standard of integrity,
care, and undivided loyalty demanded
by a fiduciary’s position of trust and
confidence. This targeted approach of
allowing the Department to give special
attention to parties with certain criminal
convictions or with a history of
egregious conduct with respect to
compliance with the exemption should
provide significant protections for
Retirement Investors while preserving
wide availability of investment advice
arrangements and products.
Although the Department expects this
proposed exemption to generate
significant benefits, it has not quantified
the benefits due to a lack of available
data. However, the Department expects
the benefits to outweigh the compliance
costs associated with this proposal
because it creates an additional pathway
for compliance with ERISA’s prohibited
transaction provisions. This new
pathway is broader than existing
exemptions, and thus applies to a wider
range of transaction arrangements and
products than the relief that is already
available. The Department anticipates
that entities will generally take
advantage of the exemptive relief
available in this proposal only if it is
less costly than other alternatives
already available, including avoiding
prohibited transactions or complying
with a different exemption. The
Department requests comments about
the specific benefits that may flow from
the exemption and invites commenters
to submit quantifiable data that would
support or disprove the Department’s
expectations.
Costs
To estimate compliance costs
associated with the proposed
exemption, the Department takes into
account the changed regulatory
baseline. For example, the Department
assumes affected entities will likely
incur incremental costs if they are
already subject to another regulator’s
similar rules or requirements. Because
this proposed exemption is intended to
align significantly with other regulators’
rules and standards of conduct, the
Department expects the compliance
costs associated with this proposal to be
modest. The Department estimates that
the proposed exemption would impose
costs of more than $44 million in the
first year and $42 million in each
subsequent year.76 Over 10 years, the
76 These estimates rely on the Employee Benefits
Security Administration’s 2018 labor rate estimates.
See Labor Cost Inputs Used in the Employee
Benefits Security Administration, Office of Policy
and Research’s Regulatory Impact Analyses and
Paperwork Reduction Act Burden Calculation,
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Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 / Proposed Rules
costs associated with the proposal
would be approximately $294 million,
annualized to $42 million per year
(using a 7 percent discount rate).77
Using a perpetual time horizon (to allow
the comparisons required under E.O.
13771), the annualized costs in 2016
dollars are $30 million at a 7 percent
discount rate. These costs are broken
down and explained below. More
details are provided in the Paperwork
Reduction Act section as well. The
Department requests comments on this
overall estimate and is especially
interested in how different entities will
incur costs associated with this
proposed exemption as well as any
quantifiable data that would support or
contradict any aspect of its analysis
below.
Affected Entities
As a first step, the Department
examines the entities likely to be
affected by the proposed exemption.
The proposal would potentially impact
SEC- and state-registered investment
advisers (IAs), broker-dealers (BDs),
banks, and insurance companies, as
well as their employees, agents, and
representatives. The Department
acknowledges that not all these entities
will serve as investment advice
fiduciaries to Plans and IRAs within the
meaning of ERISA and the Code.
Additionally, because other exemptions
are also currently available to these
entities, it is unclear how widely
Financial Institutions will rely upon the
exemption and which firms are most
likely to choose to rely on it. To err on
the side of overestimation, the
Department includes all entities eligible
for this proposed relief in its cost
estimation. The Department solicits
comments about which, and how many,
entities would likely utilize this
proposed exemption.
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Broker-Dealers (BDs)
As of December 2018, there were
3,764 registered BDs. Of those, 2,766, or
approximately 73.5 percent, reported
retail customer activities,78 while 998
were estimated to have no retail
customers. The Department does not
have information about how many BDs
advise Retirement Investors, which, as
defined in the proposed exemption
Employee Benefits Security Administration (June
2019), https://www.dol.gov/sites/dolgov/files/EBSA/
laws-and-regulations/rules-and-regulations/
technical-appendices/labor-cost-inputs-used-inebsa-opr-ria-and-pra-burden-calculations-june2019.pdf.
77 The costs would be $357 million over 10-year
period, annualized to $42 million per year, if a 3
percent discount rate is applied.
78 Regulation Best Interest Release, 84 FR at
33407.
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include Plan fiduciaries, Plan
participants and beneficiaries, and IRA
owners. However, according to one
compliance survey, about 52 percent of
IAs provide advice directly to
retirement plans.79 Assuming the same
percentage of BDs service retirement
plans, nearly 2,000 BDs would be
affected by the proposed exemption.80
The proposal may also impact BDs that
advise Retirement Investors that are
Plan participants or beneficiaries, or
IRA owners, but the Department does
not have a basis to estimate the number
of these BDs. The Department assumes
that such BDs would be considered as
providing recommendations to retail
customers under the SEC’s Regulation
Best Interest.
To continue servicing retirement
plans with respect to transactions that
otherwise would be prohibited under
ERISA and the Code, this group of BDs
would be able to rely on the proposed
exemption.81 Because BDs with retail
businesses are subject to the SEC’s
Regulation Best Interest, they already
comply with, or are preparing to comply
with, standards functionally identical to
those set forth in the proposed
exemption.
SEC-Registered Investment Advisers
(IAs)
As of December 2018, there were
approximately 13,299 SEC-registered
IAs 82 and 17,268 state-registered IAs.83
An IA must register with the
appropriate regulatory authorities, with
the SEC or with state securities
authorities. IAs registered with the SEC
are generally larger than state-registered
IAs, both in staff and in regulatory
assets under management (RAUM).84
79 2019 Investment Management Compliance
Testing Survey, Investment Adviser Association
(Jun. 18, 2019), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/about/190618_
IMCTS_slides_after_webcast_edits.pdf.
80 If this assumption is relaxed to include all BDs,
the costs would increase by $1 million for the first
year and by $0.02 million for subsequent years.
81 The Department’s estimate of compliance costs
does not include any state-registered BDs because
the exception from SEC registration for BDs is very
narrow. See Guide to Broker-Dealer Registration,
Securities and Exchange Commission (Apr. 2008),
www.sec.gov/reportspubs/investor-publications/
divisionsmarketregbdguidehtm.html.
82 Form CRS Relationship Summary Release at
33564.
83 Id. at 33565. (Of these 17,268 state-registered
IAs, 125 are also registered with SEC and 204 are
also dual registered BDs.)
84 After the Dodd-Frank Wall Street Reform and
Consumer Protection Act, an IA with $100 million
or more in regulatory assets under management
generally registers with the SEC, while an IA with
less than $100 million registers with the state in
which it has its principle office, subject to certain
exceptions. For more details about the registration
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SEC-registered IAs that advise
retirement plans and other Retirement
Investors would be directly affected by
the proposed exemption.
Some IAs are dual-registered as BDs.
To avoid double counting when
estimating compliance costs, the
Department counted dual-registered
entities as BDs and excluded them from
the burden estimates of IAs.85 The
Department estimates there to be 12,940
SEC-registered IAs, a figure produced by
subtracting the 359 dually-registered IAs
from the 13,299 SEC-registered IAs.
Similar to BDs, the Department
assumes that about 52 percent of SECregistered IAs provide recommendations
or services to retirement plans.86
Applying this assumption, the
Department estimates that
approximately 6,729 SEC-registered IAs
currently service retirement plans. An
inestimable number of IAs may provide
advice only to Retirement Investors that
are Plan participants or beneficiaries or
IRA owners, rather than retirement
plans. These IAs are fiduciaries, and
they already operate under conditions
functionally identical to those required
by the proposed exemption.87
Accordingly, the proposed exemption
would pose no more than a nominal
burden for these entities.
State-Registered Investment Advisers
As of December 2018, there were
16,939 state-registered IAs.88 Of these
state-registered IAs, 13,793 provide
advice to retail investors, while 3,146 do
not.89 State-registered IAs tend to be
smaller than SEC-registered IAs, both in
RAUM and staff. For example,
according to one survey of both SECand state-registered IAs, about 47
percent of respondent IAs reported 11 to
of IAs, see General Information on the Regulation
of Investment Advisers, Securities and Exchange
Commission (Mar. 11, 2011), www.sec.gov/
divisions/investment/iaregulation/memoia.htm; see
also A Brief Overview: The Investment Adviser
Industry, North American Securities Administrators
Association (2019), www.nasaa.org/industryresources/investment-advisers/investment-adviserguide/.
85 The Department applied this exclusion rule
across all types of IAs, regardless of registration
(SEC registered versus state only) and retail status
(retail versus nonretail).
86 2019 Investment Management Compliance
Testing Survey, supra note 79.
87 SEC Standards of Conduct Rulemaking: What
It Means for RIAs, Investment Adviser Association
(July 2019), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/resources/IAAStaff-Analysis-Standards-of-ConductRulemaking2.pdf.
88 This excludes state-registered IAs that are also
registered with the SEC or dual registered BDs.
89 Form CRS Relationship Summary Release.
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50 employees.90 In contrast, an
examination of state-registered IAs
reveals about 80 percent reported only
0 to 2 employees.91 According to one
report, 64 percent of state-registered IAs
manage assets under $30 million.92
According to a study by the North
American Securities Administrators
Association, about 16 percent of stateregistered IAs provide advice or services
to retirement plans.93 Based on this
study, the Department assumes that 16
percent of state-registered IAs advise
retirement plans. Thus, the Department
estimates that approximately 2,710
state-registered, nonretail IAs provide
advice to retirement plans and other
Retirement Investors.
Insurers
The proposed exemption would affect
insurers. Insurers are primarily
regulated by states, and no single
regulator records a national-level count
of insurers. Although state regulators
track insurers, the sum of all insurers
cannot be calculated by aggregating
individual state totals because
individual insurers often operate in
multiple states. However, the NAIC
estimates there were approximately 386
insurers directly writing annuities in
2018. Some of these insurers may not
sell any annuity contracts in the IRA or
retirement plan markets. Furthermore,
insurers can rely on other existing
exemptions instead of the proposed
exemption. Due to lack of data, the
Department includes all 386 insurers in
its cost estimation, although this likely
overestimates costs. The Department
invites any comments about how many
insurers would utilize this proposed
exemption.
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Banks
There are 5,362 federally insured
depository institutions in the United
States.94 The Department understands
that banks most commonly use
‘‘networking arrangements’’ to sell retail
90 2019 Investment Management Compliance
Testing Survey, supra note 79.
91 2019 Investment Adviser Section Annual
Report, North American Securities Administrators
Association (May 2019), www.nasaa.org/wpcontent/uploads/2019/06/2019–IA-SectionReport.pdf.
92 2018 Investment Adviser Section Annual
Report, North American Securities Administrators
Association (May 2018), www.nasaa.org/wpcontent/uploads/2018/05/2018–NASAA–IA-ReportOnline.pdf.
93 2019 Investment Adviser Section Annual
Report, supra note 91.
94 The FDIC reports there are 4,681 Commercial
banks and 681 Savings Institutions (thrifts) for
5,362 FDIC- Insured Institutions as of March 31,
2019. For more details, see Statistics at a Glance,
Federal Deposit Insurance Corporation (Mar. 31,
2019), www.fdic.gov/bank/statistical/stats/
2019mar/industry.pdf.
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non-deposit investment products
(RNDIPs), including, among other
products, equities, fixed-income
securities, exchange-traded funds, and
variable annuities.95 Under such
arrangements, bank employees are
limited to performing only clerical or
ministerial functions in connection with
brokerage transactions. However, bank
employees may forward customer funds
or securities and may describe, in
general terms, the types of investment
vehicles available from the bank and BD
under the arrangement. Similar
restrictions exist with respect to bank
employees’ referrals of insurance
products and IAs. Because of the
limitations, the Department believes
that in most cases such referrals will not
constitute fiduciary investment advice
within the meaning of the proposed
exemption. Due to the prevalence of
banks using networking arrangements
for transactions related to RNDIPs, the
Department believes that most banks
will not be affected with respect to such
transactions.
The Department does not have
sufficient data to estimate the costs to
banks of any other investment advice
services because it does not know how
frequently banks use their own
employees to perform activities that
would be otherwise prohibited. The
Department invites comments on the
magnitude of such costs and welcomes
submission of data that would facilitate
their quantification.
Costs Associated With Disclosures
The Department estimates the
compliance costs associated with the
disclosure requirement would be
approximately $1 million in the first
year and $0.3 million per year in each
subsequent year.96
Section II(b) of the proposed
exemption would require Financial
Institutions to acknowledge, in writing,
their status as fiduciaries under ERISA
and the Code. In addition, the
institutions must furnish a written
description of the services they provide
and any material conflicts of interest.
For many entities, including IAs, this
condition would impose only modest
additional costs, if any at all. Most IAs
already disclose their status as a
fiduciary and describe the types of
services they offer in Form ADV. BDs
95 For more details about ‘‘networking
arrangements,’’ see Conflict of Interest Final Rule,
Regulatory Impact Analysis for Final Rule and
Exemptions, U.S. Department of Labor (Apr. 2016),
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf.
96 Except where specifically noted, all cost
estimates are expressed in 2019 dollars throughout
this document.
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with retail investors are also required, as
of June 30, 2020, to provide disclosures
about services provided and conflicts of
interest on Form CRS and pursuant to
the disclosure obligation in Regulation
Best Interest. Even among entities that
currently do not provide such
disclosures, such as insurers and some
BDs, the Department believes that
developing disclosures required in this
proposed exemption would not
substantially increase costs because the
required disclosures are clearly
specified and limited in scope.
Not all entities will decide to use the
proposed exemption. Some may instead
rely on other existing exemptions that
better align with their business models.
However, for the cost estimation, the
Department assumes that all eligible
entities would use the proposed
exemption and incur, on average,
modest costs.
The Department estimates that
developing disclosures that
acknowledge fiduciary status and
describe the services offered and any
material conflicts of interest would
incur costs of approximately $0.7
million in the first year.97
The Department estimates that it
would cost Financial Institutions about
$0.3 million to print and mail required
disclosures to Retirement Investors,98
97 A written acknowledgment of fiduciary status
would cost approximately $0.2 million, while a
written description of the services offered and any
material conflicts of interest would cost another
$0.5 million. The Department assumes that 11,782
Financial Institutions, comprising 1,957 BDs, 6,729
SEC-registered IAs, 2,710 state-registered IAs, and
386 insurers, are likely to engage in transactions
covered under this PTE. For a detailed description
of how the number of entities is estimated, see the
Paperwork Reduction Act section, below. The $0.2
million costs associated with a written
acknowledgment of fiduciary status are calculated
as follows. The Department assumes that it will take
each retail BD firm 15 minutes, each nonretail BD
or insurance firm 30 minutes, and each registered
IA 5 minutes to prepare a disclosure conveying
fiduciary status at an hourly labor rate of $138.41,
resulting in cost burden of $221,276. Accordingly,
the estimated per-entity cost ranges from $11.53 for
IAs to $69.21 for non-retail BDs and insurers. The
$0.5 million costs associated with a written
description of the services offered and any material
conflicts of interest are calculated as follows. The
Department assumes that it will take each retail BD
or IA firm 5 minutes, each small nonretail BD or
small insurer 60 minutes, and each large nonretail
BDs or larger insurer 5 hours to prepare a disclosure
conveying services provided and any conflicts of
interest at an hourly labor rate of $138.41, resulting
in cost burden of $510,877. Accordingly, the
estimated per-entity cost ranges from $11.53 for
retail broker-dealers and IAs to $692.07 for large
non-retail BDs and insurers.
98 The Department estimates that approximately
1.8 million Retirement Investors are likely to engage
in transactions covered under this PTE, of which
8.1 percent are estimated to receive paper
disclosures. Distributing paper disclosures is
estimated to take a clerical professional 1 minute
per disclosure, at an hourly labor rate of $64.11,
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but it assumes most required disclosures
would be electronically delivered to
plan fiduciaries. The Department
assumes that approximately 92 percent
of participants who roll over their plan
assets to IRAs would receive required
disclosures electronically.99 According
to one study, approximately 3.6 million
accounts in retirement plans were rolled
over to IRAs in 2018.100 Of those, about
half, 1.8 million, were rolled over by
financial services professionals.101
Therefore, prior to transactions
necessitated by rollovers, participants
are likely to receive required disclosures
from their Investment Professionals. In
some cases, Financial Institutions and
Investment Professionals may send
required disclosures to participants,
particularly those with participantdirected defined contribution accounts,
before providing investment advice. The
Department welcomes comments that
speak to the costs associated with
required disclosures.
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Costs Associated With Written Policies
and Procedures
The Department estimates that
developing policies and procedures
prudently designed to ensure
compliance with the Impartial Conduct
Standards would cost approximately
$1.7 million in the first year.102
The estimated compliance costs
reflect the different regulatory baselines
resulting in a cost burden of $156,094. Assuming
the disclosures will require two sheets of paper at
a cost $0.05 each, the estimated material cost for the
paper disclosures is $14,608. Postage for each paper
disclosure is expected to cost $0.55, resulting in a
printing and mailing cost of $94,954.
99 The Department estimates approximately 56.4
percent of participants receive disclosures
electronically based on data from various data
sources including the National
Telecommunications and Information Agency
(NTIA). In light of the 2019 Electronic Disclosure
Regulation, the Department estimates that
additional 35.5 percent of participants receive them
electronically. In total, 91.9 percent of participants
are expected to receive disclosures electronically.
100 U.S. Retirement-End Investor 2019: Driving
Participant Outcomes with Financial Wellness
Programs, The Cerulli Report (2019).
101 Id.
102 The Department assumes that 11,782 Financial
Institutions, comprising 1,957 BDs, 6,729 SECregistered IAs, 2,710 state-registered IAs, and 386
insurers, are likely to engage in transactions
covered under this PTE. For a detailed description
of how the number of entities is estimated, see the
Paperwork Reduction Act section, below. The
Department assumes that it will take a legal
professional, at an hourly labor rage of $138.41,
22.5 minutes at each small retail BD, 45 minutes at
each large retail BD, 5 hours at each small nonretail
BD, 10 hours at each large nonretail BD, 15 minutes
at each small IA, 30 minutes at each large IA, 5
hours at each small insurer, and 10 hours at each
large insurer to meet the requirement. This results
in a cost burden estimate of $1,664,127.
Accordingly, the estimated per-entity cost ranges
from $34.60 for small IAs to $1,384.14 for large nonretail BDs and insurers. These compliance cost
estimates are not discounted.
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under which different entities are
currently operating. For example, IAs
already operate under a standard
functionally identical to that required
under the proposed exemption,103 and
report how they address conflicts of
interests in Form ADV.104 Similarly,
BDs subject to the SEC’s Regulation Best
Interest also operate, or are preparing to
operate, under a standard that is
functionally identical to the proposed
exemption. To comply fully with the
proposed exemption, however, these
entities may need to review their
policies and procedures and amend
their existing policies and procedures.
These additional steps would impose
additional, but not substantial, costs at
the Financial Institution level.
The insurers and non-retail BDs
currently operating under a suitability
standard in most states and largely
relying on transaction-based forms of
compensation, such as commissions,
would be required to establish written
policies and procedures that comply
with the Impartial Conduct Standards, if
they choose to use this proposed
exemption. These activities would
likely involve higher cost increases than
those experienced by IAs and retail BDs.
To a large extent, however, the entities
facing potentially higher costs would
likely elect to rely on other existing
exemptions. In this regard, the burden
estimates on these entities are likely
overestimated to the extent that many of
these entities would not use this
proposed exemption.
103 See SEC Fiduciary Standard of Conduct
Interpretation (Release No. IA–5248); see also A
Brief Overview: The Investment Adviser Industry,
North American Securities Administrators
Association (2019), www.nasaa.org/industryresources/investment-advisers/investment-adviserguide/. (According to the NASAA, the anti-fraud
provisions of the Investment Advisers Act of 1940,
the NASAA Model Rule 102(a)(4)–1, and most state
laws require IAs to act as fiduciaries. NASAA
further states, ‘‘Fiduciary duty requires the adviser
to hold the client’s interest above its own in all
matters. Conflicts of interest should be avoided at
all costs. However, there are some conflicts that will
inevitably occur . . . In these instances, the adviser
must take great pains to clearly and accurately
describe those conflicts and how the adviser will
maintain impartiality in its recommendations to
clients.’’
104 See Form ADV [17 CFR 279.1] (Part 2A of
Form ADV requires IAs to prepare narrative
brochures that contain information such as the
types of advisory services offered, fee schedule,
disciplinary information and conflicts of interest.
For example, item 10.C of part 2A asks IAs to
identify if certain relationships or arrangements
create a material conflict of interest, and to describe
the nature of the conflict and how to address it. If
an IA recommends other IAs for its clients and the
IA receives compensation directly or indirectly
from those advisers that creates a material conflict
of interest or the IA has other business relationships
with those advisers that create a material conflict
of interest, Item 10.D of Part 2A requires the IA to
discuss the material conflicts of interest that these
practices create and how to address them.)
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Because smaller entities generally
have less complex business practices
and arrangements than their larger
counterparts, it would likely cost less
for them to comply with the proposed
exemption. This is reflected in the
compliance cost estimates presented in
this economic analysis.
Costs Associated With Annual Report of
Retrospective Review
Section II(d) would require Financial
Institutions to conduct an annual
retrospective review reasonably
designed to assist the Financial
Institution in detecting and preventing
violations of, and achieving compliance
with the Impartial Conduct Standards
and their own policies and procedures,
and to produce a written report that is
certified by the institution’s chief
executive officer. The Department
estimates that this requirement will
impose $1.7 million in costs each
year.105 FINRA requires BDs to establish
and maintain a supervisory system
reasonably designed to facilitate
compliance with applicable securities
laws and regulations,106 to test the
supervisory system, and to amend the
system based on the testing.107
Furthermore, the BD’s chief executive
officer (or equivalent officer) must
annually certify that it has processes in
place to establish, maintain, test, and
modify written compliance policies and
written supervisory procedures
reasonably designed to achieve
compliance with FINRA rules.108
105 The Department assumes that 794 Financial
Institutions, comprising 20 BDs, 538 SEC-registered
IAs, 217 state-registered IAs, and 20 insurers, would
be likely to incur costs associated with producing
a retrospective review report. The Department
estimates it will take a legal professional, at an
hourly labor rate of $138.41, 5 hours for small firms
and 10 hours for large firms to produce a
retrospective review report, resulting in an
estimated cost burden of $973,297. The estimate
per-entity cost ranges from $692.07 for small
entities to $1,384.14 for large entities. Additionally,
the Department assumes that 9,845 Financial
Institutions, comprising 20 BDs, 6,729 SECregistered IAs, 2,710 state-registered IAs, and 386
insurers, would be likely to incur costs associated
with reviewing and certifying the report. The
Department estimates it will take a legal
professional 15 minutes for small firms and 30
minutes for large firms to review the report and
certify the exemption, resulting in an estimated cost
burden of $718,806. The estimated per-entity cost
ranges from $41.41 for small entities to $82.82 for
large entities. For a detailed description of how the
number of entities for each cost burden is
estimated, see the Paperwork Reduction Act
section.
106 Rule 3110. Supervision, FINRA Manual,
www.finra.org/rules-guidance/rulebooks/finrarules/3110.
107 Rule 3120. Supervisory Control System,
FINRA Manual, www.finra.org/rules-guidance/
rulebooks/finra-rules/3120.
108 Rule 3130. Annual Certification of Compliance
and Supervisory Processes, FINRA Manual,
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Many insurers are already subject to
similar standards.109 For instance, the
NAIC’s Model Regulation contemplates
that insurers establish a supervision
system that is reasonably designed to
comply with the Model Regulation and
annually provide senior management
with a written report that details
findings and recommendations on the
effectiveness of the supervision
system.110 States that have adopted the
Model Regulation also require insurers
to conduct annual audits and obtain
certifications from senior managers.
Based on these regulatory baselines, the
Department believes the compliance
costs attributable to this requirement
would be modest.
SEC-registered IAs are already subject
to Rule 206(4)–7, which requires them
to adopt and implement written policies
and procedures reasonably designed to
ensure compliance with the Advisers
Act and rules adopted thereunder and
review them annually for adequacy and
the effectiveness of their
implementation. Under the same rule,
SEC-registered IAs must designate a
chief compliance officer to administer
the policies and procedures. However,
they are not required to conduct an
internal audit nor produce a report
detailing findings from its audit.
Nonetheless, many seem to voluntarily
produce reports after conducting
internal audits. One compliance testing
survey reveals that about 92 percent of
SEC-registered IAs voluntarily provide
an annual compliance program review
report to senior management.111 Relying
on this information, the Department
estimates that only 8 percent of SECregistered IAs advising retirement plans
would incur costs associated with
producing a retrospective review report.
The rest would incur minimal costs to
satisfy the conditions related to this
requirement.
www.finra.org/rules-guidance/rulebooks/finrarules/3130.
109 The previous NAIC Suitability in Annuity
Transactions Model Regulation (2010) had been
adopted by many states before the newer NAIC
Model Regulation was approved in 2020. Both
previous and updated Model Regulations contain
similar standards as written report of retrospective
review conditions of the proposed exemption.
110 NAIC Suitability in Annuity Transactions
Model Regulation, Spring 2020, Section 6.C.(2)(i),
available at https://www.naic.org/store/free/MDL275.pdf. (The same requirement is found in the
previous NAIC Suitability in Annuity Transactions
Model Regulation (2010), section 6.F.(1)(f).)
111 2018 Investment Management Compliance
Testing Survey, Investment Adviser Association
(Jun. 14, 2018), https://
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Due to lack of data, the Department
based the cost estimates associated with
state-registered IAs on the assumption
that 8 percent of state-registered IAs
advising retirement plans currently do
not produce compliance review reports,
and thus would incur costs associated
with the oversight conditions in the
proposed exemption. As discussed
above, compared with SEC-registered
IAs, state-registered IAs tend to be
smaller in terms of RAUM and staffing,
and thus may not have formal
procedures in place to conduct
retrospective reviews to ensure
regulatory compliance. If that were often
the case, the Department’s assumption
would likely underestimate costs.
However, because state-registered IAs
tend to be smaller than their SECregistered counterparts, they tend to
handle fewer transactions, limit the
range of transactions they handle, and
have fewer employees to supervise.
Therefore, the costs associated with
establishing procedures to conduct
internal retrospective reviews and
produce compliance reports would
likely be low. In sum, the Department
estimates that the costs associated with
the retrospective review requirement of
the proposed exemption would be
approximately $1.7 million each year.
Costs Associated With Rollover
Documentation
In 2018, slightly more than 3.6
million retirement plan accounts rolled
over to an IRA, while slightly less than
0.5 million accounts were rolled over to
other retirement plans.112 Not all
rollovers were managed by financial
services professionals. As discussed
above, about half of all rollovers from
plans to IRAs were handled by financial
services professionals, while the rest
were self-directed.113 Based on this
information, the Department estimates
approximately 1.8 million participants
obtained advice from financial services
professionals.114 Some of these rollovers
likely involved financial services
112 U.S. Retirement-End Investor 2019, supra note
100. (To estimate costs associated with
documenting rollovers, the Department did not
include rollovers from plans to plans because planto-plan rollovers are unlikely to be mediated by
Investment Professionals. Also plan-to-plan
rollovers occur far less frequently than plan-to-IRA
rollovers. Thus, even if plan-to-plan rollovers were
included in the cost estimation, the impact would
likely be small.)
113 Id.
114 Another report suggested a higher share, 70
percent of households owning IRAs held their IRAs
through Investment Professionals. Note that this is
household level data based on an IRA owners’
survey, which was not particularly focused on
rollovers. (See Sarah Holden & Daniel Schrass, ‘‘The
Role of IRAs in US Households’ Saving for
Retirement, 2018,’’ ICI Research Perspective, vol.
24, no. 10 (Dec. 2018).)
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professionals who were not fiduciaries
under the five-part test, thus the actual
number of rollovers affected by this
proposed exemption is likely lower than
1.8 million. The proposed exemption
would require the Financial Institution
to document why a recommended
rollover is in the best interest of the
Retirement Investor. As a best practice,
the SEC already encourages firms to
record the basis for significant
investment decisions such as rollovers,
although doing so is not required under
Regulation Best Interest.115 In addition,
some firms may voluntarily document
significant investment decisions to
demonstrate compliance with
applicable law, even if not required.116
Therefore, the Department expects that
many Financial Institutions already
document significant decisions like
rollovers.
In estimating costs associated with
rollover documentations, the
Department faces uncertainty with
regards to the number of rollovers that
would be affected by the proposed
exemption. Given this uncertainty,
below the Department discusses a range
of cost estimates. For the lower-end cost
estimate, the Department estimates that
the costs for documenting the basis for
investment decisions would come to
$15 million per year.117 This low-end
estimate is based on the assumption that
most financial services professionals
already incorporate documenting
rollover justifications in their regular
business practices and another
assumption that not all rollovers are
handled by financial services
professionals who act in a fiduciary
115 Regulation Best Interest Release, 84 FR at
33360.
116 According to a comment letter about the
proposed Regulation Best Interest, BDs have a
strong financial incentive to retain records
necessary to document that they have acted in the
best interest of clients, even if it is not required.
Another comment letter about the proposed
Regulation Best Interest suggests that BDs generally
maintain documentation for suitability purposes.
117 For those rollovers affected by this proposed
exemption it would take, on average, 10 minutes
per rollover to document justifications. Thus, the
Department estimates almost 75,500 burden hours
in aggregate and slightly less than $15 million
assuming $194.77 hourly rate for personal financial
advisor. The Department assumes that financial
services professionals would spend on average 10
minutes to document the basis for rollover
recommendations. The Department understands
that financial services professionals seek and gather
information regarding to investor profiles in
accordance with other regulators’ rules. Further,
financial professionals often discuss the basis for
their recommendations and associated risks with
their clients as a best practice. After collecting
relevant information and discussing the basis for
certain recommendations with clients, the
Department believes that it would take relatively
short time to document justifications for rollover
recommendations.
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capacity.118 For the upper-end cost
estimate, the Department assumes that
all rollovers involving financial services
professionals would be affected by the
proposed exemption. Then the
estimated costs would come to $59
million per year.119 For the primary cost
estimate, the Department assumes that
67.4 percent of rollovers involving
financial services professionals would
be affected by the proposed
exemption.120 Under this assumption,
the estimated costs would be $40
million per year.121 The Department
acknowledges that uncertainty still
remains as some financial services
professionals who do not generally
serve as fiduciaries of their Plan clients
may act in a fiduciary capacity in
certain rollover recommendations, and
thus would be affected by the proposed
exemption. Alternatively, the opposite
can be true: Financial services
professionals who usually serve as
fiduciaries of their Plan clients may act
in a non-fiduciary capacity in certain
rollover recommendations, and thus
would not be affected by the proposed
exemption. The Department welcomes
any comments and data that can help
more precisely estimating the number of
rollovers affected by the exemption. In
addition, the Department invites
comments about financial services
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118 To
estimate costs, the Department further
assumes that approximately 50 percent of 1.8
million rollovers involve financial professionals
who already document rollover recommendations
as a best practice. Additionally, the Department
assumes half of the remaining half of rollovers, thus
an additional quarter of the total 1.8 million
rollovers, are handled by financial professionals
who act in a non-fiduciary capacity. Thus the
Department assumes that approximately threequarters of 1.8 million rollovers would not be
affected by the proposed exemption, while onequarter of 1.8 million rollovers would be affected.
119 Assuming that it would take, on average, 10
minutes per rollover to document justifications, the
Department estimates about 301,850 burden hours
in aggregate and slightly less than $59 million
assuming $194.77 hourly rate for personal financial
advisor.
120 In 2019, a survey was conducted to financial
services professionals who hold more than 50
percent of their practice’s assets under management
in employer-sponsored retirement plans. These
financial services professionals include both BDs
and IAs. In addition, 45 percent of those
professionals indicated that they make a proactive
effort to pursue IRA rollovers from their DC plan
clients. According to this survey, approximately
32.6 percent responded that they function in a nonfiduciary capacity. Therefore, the Department
assumes that approximately 67.4 percent of
financial service professionals serve their Plan
clients as fiduciaries. See U.S. Defined Contribution
2019: Opportunities for Differentiation in a
Competitive Landscape, The Cerulli Report (2019).
121 Assuming that it would take, on average, 10
minutes per rollover to document justifications, the
Department estimates over 203,000 burden hours in
aggregate and slightly less than $40 million
assuming $194.77 hourly rate for personal financial
advisor.
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professionals’ practices about
documenting rollover
recommendations, particularly whether
financial services professionals often
utilize a form with a list of common
reasons for rollovers and how long on
average it would take for a financial
services professional to document a
rollover recommendation.122
comments regarding the burden
associated with the recordkeeping
requirement.
Costs Associated With Recordkeeping
Section IV of the proposed exemption
would require Financial Institutions to
maintain records demonstrating
compliance with the exemption for 6
years. The Financial Institutions would
also be required to make records
available to regulators, Plans, and
participants. Recordkeeping
requirements in Section IV are generally
consistent with requirements made by
the SEC and FINRA.123 In addition, the
recordkeeping requirements correspond
to the 6-year period in section 413 of
ERISA. The Department understands
that many firms already maintain
records, as required in Section IV, as
part of their regular business practices.
Therefore, the Department expects that
the recordkeeping requirement in
Section IV would impose a negligible
burden.124 The Department welcomes
No New Exemption
The Department considered merely
leaving in place the existing exemptions
that provide prohibited transaction
relief for investment advice
transactions. However, the existing
exemptions generally apply to more
limited categories of transactions and
investment products, and they include
conditions that are tailored to the
particular transactions or products
covered under each exemption.
Therefore, under the existing
exemptions, Financial Institutions may
find it inefficient to implement advice
programs for all of the different
products and services they offer. By
providing a single set of conditions for
all investment advice transactions, this
proposal aims to promote the use and
availability of investment advice for all
types of transactions in a manner that
aligns with the conduct standards of
other regulators, such as the SEC.
122 The Department assumes that financial
services professionals would spend on average 10
minutes to document the basis for rollover
recommendations. The Department understands
that financial services professionals seek and gather
information regarding to investor profiles in
accordance with other regulators’ rules. Further,
financial professionals often discuss the basis for
their recommendations and associated risks with
their clients as a best practice. After collecting
relevant information and discussing the basis for
certain recommendations with clients, the
Department believes that it would take relatively
short time to document justifications for rollover
recommendations. However, the Department
welcomes comments about the burden hours
associated with documenting rollover
recommendations.
123 The SEC’s Regulation Best Interest amended
Rule 17a–4(e)(5) to require that BDs retain all
records of the information collected from or
provided to each retail customer pursuant to
Regulation Best Interest for at least 6 years after the
earlier of the date the account was closed or the
date on which the information was last replaced or
updated. FINRA Rule 4511 also requires its
members preserve for a period of at least 6 years
those FINRA books and records for which there is
no specified period under the FINRA rules or
applicable Exchange Act rules.
124 The Department notes that insurers that are
expected to use the proposed exemption are
generally not subject to the SEC’s Regulation Best
Interest and FINRA rules. The Department
understands, however, that some states’ insurance
regulations require insurers to retain similar records
for less than six years. For example, some states
require insurers to maintain records for five years
after the insurance transaction is completed. Thus,
the recordkeeping requirement of the proposed
exemption would likely impose additional burden
on the 386 insurers that the Department estimates
would rely on this proposed exemption. However,
the Department expects most insurers to maintain
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Regulatory Alternatives
The Department considered various
alternative approaches in developing
this proposed exemption. Those
alternatives are discussed below.
Including an Independent Audit
Requirement in the Proposed Exemption
The proposal would require Financial
Institutions to conduct a retrospective
review, at least annually, designed to
detect and prevent violations of the
Impartial Conduct Standards, and to
ensure compliance with the policies and
procedures governing the exemption.
The exemption does not require that the
review be conducted by an independent
party, allowing Financial Institutions to
self-review.
As an alternative to this approach, the
Department considered requiring
independent audits to ensure
compliance under the exemption. The
Department decided against this
records electronically. Electronic storage prices
have decreased substantially as cloud services
become more widely available. For example, cloud
storage space costs on average $0.018 to $0.021 per
GB per month. Some estimate that approximately
250,000 PDF files or other typical office documents
can be stored on 100GB. Accordingly, the
Department believes that maintaining records in
electronic storage for an additional year or two
would not impose a significant cost burden on the
affected 386 insurers. (For more detailed pricing
information of three large cloud service providers,
see https://cloud.google.com/products/calculator;
or https://azure.microsoft.com/en-us/pricing/
calculator/; or https://
calculator.s3.amazonaws.com/.) The
Department welcomes comments on this
assessment and the effect of the recordkeeping
requirement on insurers.
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approach to avoid the significant cost
burden that this requirement would
impose. The proposal instead requires
that Financial Institutions provide a
written report documenting the
retrospective review, and supporting
information, to the Department and
other regulators within 10 business days
of a request. The Department believes
this proposed requirement compels
Financial Institutions to take the review
obligation seriously, regardless of
whether they choose to hire an
independent auditor to conduct the
review.
Paperwork Reduction Act
As part of its continuing effort to
reduce paperwork and respondent
burden, the Department conducts a
preclearance consultation program to
provide the general public and Federal
agencies with an opportunity to
comment on proposed and continuing
collections of information in accordance
with the Paperwork Reduction Act of
1995 (PRA) (44 U.S.C. 3506(c)(2)(A)).
This helps to ensure that the public
understands the Department’s collection
instructions, respondents can provide
the requested data in the desired format,
reporting burden (time and financial
resources) is minimized, collection
instruments are clearly understood, and
the Department can properly assess the
impact of collection requirements on
respondents.
Currently, the Department is soliciting
comments concerning the proposed
information collection request (ICR)
included in the proposed Improving
Investment Advice for Workers &
Retirees (‘‘Proposed PTE’’). A copy of
the ICR may be obtained by contacting
the PRA addressee shown below or at
www.RegInfo.gov.
The Department has submitted a copy
of the Proposed PTE to the Office of
Management and Budget (OMB) in
accordance with 44 U.S.C. 3507(d) for
review of its information collections.
The Department and OMB are
particularly interested in comments
that:
• Evaluate whether the collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
• Evaluate the accuracy of the
agency’s estimate of the burden of the
collection of information, including the
validity of the methodology and
assumptions used;
• Enhance the quality, utility, and
clarity of the information to be
collected; and
• Minimize the burden of the
collection of information on those who
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are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology
(e.g., permitting electronic submission
of responses).
Comments should be sent to the
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10235, New Executive
Office Building, Washington, DC, 20503;
Attention: Desk Officer for the
Employee Benefits Security
Administration. OMB requests that
comments be received within 30 days of
publication of the Proposed PTE to
ensure their consideration.
PRA Addressee: Address requests for
copies of the ICR to G. Christopher
Cosby, Office of Policy and Research,
U.S. Department of Labor, Employee
Benefits Security Administration, 200
Constitution Avenue NW, Room N–
5718, Washington, DC, 20210.
Telephone (202) 693–8425; Fax: (202)
219–5333. These are not toll-free
numbers. ICRs submitted to OMB also
are available at www.RegInfo.gov.
As discussed in detail below, the
Proposed PTE would require Financial
Institutions and/or their Investment
Professionals to (1) make certain
disclosures to Retirement Investors, (2)
adopt written policies and procedures,
(3) document the basis for rollover
recommendations, (4) prepare a written
report of the retrospective review, and
(5) maintain records showing that the
conditions have been met to receive
relief under the proposed exemption.
These requirements are ICRs subject to
the Paperwork Reduction Act.
The Department has made the
following assumptions in order to
establish a reasonable estimate of the
paperwork burden associated with these
ICRs:
• Disclosures distributed
electronically will be distributed via
means already used by respondents in
the normal course of business, and the
costs arising from electronic distribution
will be negligible;
• Financial Institutions will use
existing in-house resources to prepare
the disclosures, policies and
procedures, rollover documentations,
and retrospective reviews, and to
maintain the recordkeeping systems
necessary to meet the requirements of
the Proposed PTE;
• A combination of personnel will
perform the tasks associated with the
ICRs at an hourly wage rate of $194.77
for a personal financial advisor, $64.11
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40857
for mailing clerical personnel, and
$138.41 for a legal professional; 125
• Approximately 11,782 Financial
Institutions will take advantage of the
Proposed PTE and they will use the
Proposed PTE in conjunction with
transactions involving nearly all of their
clients that are defined benefit plans,
defined contribution plans, and IRA
holders.126
Disclosures, Documentation,
Retrospective Review, and
Recordkeeping
Section II(b) of the Proposed PTE
would require Financial Institutions to
furnish Retirement Investors with a
disclosure prior to engaging in a covered
transaction. Section II(b)(1) would
require Financial Institutions to
acknowledge in writing that the
Financial Institution and its Investment
Professionals are fiduciaries under
ERISA and the Code, as applicable, with
respect to any investment advice
provided to the Retirement Investors.
Section II(b)(2) would require Financial
Institutions to provide a written
description of the services they provide
and any material conflicts of interest.
The written description must be
accurate in all material respects.
Financial Institutions will generally be
required to provide the disclosure to
each Retirement Investor once, but
Financial Institutions may need to
provide updated disclosures to ensure
accuracy.
Section II(c)(1) of the Proposed PTE
would require Financial Institutions to
establish, maintain, and enforce written
policies and procedures prudently
designed to ensure that they and their
Investment Professionals comply with
the Impartial Conduct Standards.
Section II(c)(2) would further require
that the Financial Institutions design the
policies and procedures to mitigate
conflicts of interest.
125 The Department’s 2018 hourly wage rate
estimates include wages, benefits, and overhead,
and are calculated as follows: mean wage data from
the 2018 National Occupational Employment
Survey (May 2018, www.bls.gov/news.release/
archives/ocwage_03292019.pdf), wages as a percent
of total compensation from the Employer Cost for
Employee Compensation (December 2018,
www.bls.gov/news.release/archives/ecec_
03192019.pdf), and overhead cost corresponding to
each 2-digit NAICS code from the Annual Survey
of Manufacturers (December 2017, www.census.gov/
data/Tables/2016/econ/asm/2016-asm.html)
multiplied by the percent of each occupation within
that NAICS industry code based on a matrix of
detailed occupation employment for each NAICS
industry from the BLS Office of Employment
projections (2016, www.bls.gov/emp/data/
occupational-data.htm).
126 For this analysis, ‘‘IRA holders’’ include
rollovers from ERISA plans. The Department
welcomes comments on this estimate.
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Section II(c)(3) of the Proposed PTE
would require Financial Institutions to
document the specific reasons for any
rollover recommendation and show that
the rollover is in the best interest of the
Retirement Investor.
Under Section II(d) of the Proposed
PTE, Financial Institutions would be
required to conduct an annual
retrospective review that is reasonably
designed to prevent violations of the
Proposed PTE’s Impartial Conduct
Standards and the institution’s own
policies and procedures. The
methodology and results of the
retrospective review would be reduced
to a written report that is provided to
the Financial Institution’s chief
executive officer and chief compliance
officer (or equivalent officers). The chief
executive officer would be required to
certify that (1) the officer has reviewed
the report of the retrospective review,
and (2) the Financial Institution has in
place policies and procedures prudently
designed to achieve compliance with
the conditions of the Proposed PTE, and
(3) the Financial Institution has a
prudent process for modifying such
policies and procedures. The process for
modifying policies and procedures
would need to be responsive to
business, regulatory, and legislative
changes and events, and the chief
executive officer would be required to
periodically test their effectiveness. The
review, report, and certification would
be completed no later than 6 months
following the end of the period covered
by the review. The Financial Institution
would be required to retain the report,
certification, and supporting data for at
least 6 years, and to make these items
available to the Department, any other
federal or state regulator of the Financial
Institution, or any applicable selfregulatory organization within 10
business days.
Section IV sets forth the
recordkeeping requirements in the
Proposed PTE.
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Production and Distribution of Required
Disclosures
The Department assumes that 11,782
Financial Institutions, comprising 1,957
BDs,127 6,729 SEC-registered IAs,128
127 The SEC estimated that there were 3,764 BDs
as of December 2018 (see Form CRS Relationship
Summary Release). The IAA Compliance 2019
Survey estimates that 52 percent of IAs have a
pension consulting business. The estimated number
of BDs affected by this exemption is the product of
the SEC’s estimate of total BDs in 2018 and IAA’s
estimate of the percent of IAs with a pension
consulting business.
128 The SEC estimated that there were 12,940
SEC-registered IAs that were not dually registered
as BDs as of December 2018 (see Form CRS
Relationship Summary Release). The IAA
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2,710 state-registered IAs,129 and 386
insurers,130 are likely to engage in
transactions covered under this PTE.
Each would need to provide disclosures
that (1) acknowledge its fiduciary status
and (2) identify the services it provides
and any material conflicts of interest.
The Department estimates that
preparing a disclosure indicating
fiduciary status would take a legal
professional between 5 and 30 minutes,
depending on the nature of the
business,131 resulting in an hour burden
of 1,599 132 and a cost burden of
$221,276.133 Preparing a disclosure
identifying services provided and
conflicts of interest would take a legal
professional an estimated 5 minutes to
5 hours, depending on the nature of the
business,134 resulting in an hour burden
of 3,691 135 and an equivalent cost
burden of $510,877.136
The Department estimates that
approximately 1.8 million Retirement
Investors 137 have relationships with
Financial Institutions and are likely to
engage in transactions covered under
this PTE. Of these 1.8 million
Retirement Investors, it is assumed that
8.1 percent 138 or 146,083 Retirement
Investors, would receive paper
disclosures. Distributing paper
disclosures is estimated to take a
clerical professional 1 minute per
disclosure, resulting in an hourly
burden of 2,435 139 and an equivalent
cost burden of $156,094.140 Assuming
the disclosures will require two sheets
of paper at a cost $0.05 each, the
estimated material cost for the paper
disclosures is $14,608. Postage for each
paper disclosure is expected to cost
$0.55, resulting in a printing and
mailing cost of $94,954.
Compliance 2019 Survey estimates that 52 percent
of IAs have a pension consulting business. The
estimated number of IAs affected by this exemption
is the product of the SEC’s estimate of SECregistered IAs in 2018 and the IAA’s estimate of the
percent of IAs with a pension consulting business.
129 The SEC estimated that there were 16,939
state-registered IAs that were not dually registered
as BDs as of December 2018 (see Form CRS
Relationship Summary Release). The NASAA 2019
estimates that 16 percent of state-registered IAs
have a pension consulting business. The estimated
number of state-registered IAs affected by this
exemption is the product of the SEC’s estimate of
state-registered IAs in 2018 and NASAA’s estimate
of the percent of state-registered IAs with a pension
consulting business.
130 NAIC estimates that the number of insurers
directly writing annuities as of 2018 is 386.
131 The Department assumes that it will take each
retail BD firm 15 minutes, each nonretail BD or
insurance firm 30 minutes, and each registered IA
5 minutes to prepare a disclosure conveying
fiduciary status.
132 Burden hours are calculated by multiplying
the estimated number of each firm type by the
estimated time it will take each firm to prepare the
disclosure.
133 The hourly cost burden is calculated by
multiplying the burden hour of each firm associated
with preparation of the disclosure by the hourly
wage of a legal professional.
134 The Department assumes that it will take each
retail BD or IA firm 5 minutes, each small nonretail
BD or small insurer 60 minutes, and each large
nonretail BDs or larger insurer 5 hours to prepare
a disclosure conveying services provided and any
conflicts of interest.
135 Burden hours are calculated by multiplying
the estimated number of each firm type by the
estimated time it will take each firm to prepare the
disclosure.
136 The hourly cost burden is calculated by
multiplying the burden hour of each firm associated
with preparation of the disclosure by the hourly
wage of a legal professional.
137 The Department estimates the number of
affected plans and IRAs be equal to 50 percent of
rollovers from plans to IRAs. Cerulli has estimated
the number of plans rolled into IRAs to be
3,622,198 (see U.S. Retirement-End Investor 2019,
supra note 100).
138 According to data from the National
Telecommunications and Information Agency
(NTIA), 37.7 percent of individuals age 25 and over
have access to the internet at work. According to
a Greenwald & Associates survey, 84 percent of
plan participants find it acceptable to make
electronic delivery the default option, which is
used as the proxy for the number of participants
who will not opt-out of electronic disclosure if
automatically enrolled (for a total of 31.7 percent
receiving electronic disclosure at work).
Additionally, the NTIA reports that 40.5 percent of
individuals age 25 and over have access to the
internet outside of work. According to a Pew
Research Center survey, 61 percent of internet users
use online banking, which is used as the proxy for
the number of internet users who will affirmatively
consent to receiving electronic disclosures (for a
total of 24.7 percent receiving electronic disclosure
outside of work). Combining the 31.7 percent who
receive electronic disclosure at work with the 24.7
percent who receive electronic disclosure outside of
work produces a total of 56.4 percent who will
receive electronic disclosure overall. In light of the
2019 Electronic Disclosure Regulation, the
Department estimates that 81.5 percent of the
remaining 43.6 percent of individuals will receive
the disclosures electronically. In total, 91.9 percent
of participants are expected to receive disclosures
electronically.
139 Burden hours are calculated by multiplying
the estimated number of plans receiving the
disclosures non-electronically by the estimated time
it will take to prepare the physical disclosure.
140 The hourly cost burden is calculated as the
burden hours associated with the physical
preparation of each non-electronic disclosure by the
hourly wage of a clerical professional.
141 The SEC estimated that there were 3,764 BDs
as of December 2018 (see Form CRS Relationship
Summary Release). The IAA Compliance 2019
Survey estimates that 52 percent of IAs have a
pension consulting business. The estimated number
of BDs affected by this exemption is the product of
the SEC’s estimate of total BDs in 2018 and IAA’s
estimate of the percent of IAs with a pension
consulting business.
142 The SEC estimated that there were 12,940
SEC-registered IAs, who were not dually registered
as BDs, as of December 2018 (see Form CRS
Relationship Summary Release). The IAA
Compliance 2019 Survey estimates that 52 percent
of IAs have a pension consulting business. The
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Written Policies and Procedures
Requirement
The Department assumes that 11,782
Financial Institutions, comprising 1,957
BDs,141 6,729 SEC-registered IAs,142
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2,710 state registered IAs,143 and 386
insurers,144 are likely to engage in
transactions covered under this PTE.
The Department estimates that
establishing, maintaining, and enforcing
written policies and procedures
prudently designed to ensure
compliance with the Impartial Conduct
Standards will take a legal professional
between 15 minutes and 10 hours,
depending on the nature of the
business.145 This results in an hour
burden of 12,023 146 and an equivalent
cost burden of $1,664,127.147
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Rollover Documentation Requirement
To meet the requirement of the
rollover documentation requirement,
Financial Institutions must document
the specific reasons that any
recommendation to roll over assets is in
the best interest of the Retirement
Investor. The Department estimates that
1.8 million retirement plan accounts 148
were rolled into IRAs in accordance
with advice from a financial services
professional. Due to uncertainty, the
Department discusses a range of cost
estimates. For the lower-end cost
estimate, the Department estimates that
the costs for documenting the basis for
investment decisions would come to
$15 million per year.149 This is based on
the assumption that most financial
estimated number of IAs affected by this exemption
is the product of the SEC’s estimate of SECregistered IAs in 2018 and IAA’s estimate of the
percent of IAs with a pension consulting business.
143 The SEC estimated that there were 16,939
state-registered IAs who were not dually registered
as BDs as of December 2018 (see Form CRS
Relationship Summary Release). The NASAA 2019
estimates that 16 percent of state-registered IAs
have a pension consulting business. The estimated
number of state-registered IAs affected by this
exemption is the product of the SEC’s estimate of
state-registered IAs in 2018 and NASAA’s estimate
of the percent of state-registered IAs with a pension
consulting business.
144 NAIC estimates that 386 insurers were directly
writing annuities as of 2018.
145 The Department assumes that it will take each
small retail BD 22.5 minutes, each large retail BD
45 minutes, each small nonretail BD 5 hours, each
large nonretail BD 10 hours, each small IA 15
minutes, each large IA 30 minutes, each small
insurer 5 hours, and each large insurer 10 hours to
meet the requirement.
146 Burden hours are calculated by multiplying
the estimated number of each firm type by the
estimated time it will take each firm to establish,
maintain, and enforce written policies and
procedures.
147 The hourly cost burden is calculated as the
burden hour of each firm associated with meeting
the written policies and procedures requirement
multiplied by the hourly wage of a legal
professional.
148 Cerulli has estimated the number of plans
rolled into IRAs to be 3,622,198 (see U.S.
Retirement-End Investor 2019, supra note 100). The
Department estimates that 50 percent of these
rollovers will be handled by a financial
professional.
149 See supra note 117.
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services professionals already
incorporate documenting the basis for
rollover recommendations in their
regular business practices and another
assumption that not all rollovers are
handled by financial services
professionals who act in a fiduciary
capacity.150 For the upper-end cost
estimate, the Department assumes that
all rollovers involving financial services
professionals would be affected by the
proposed exemption. Then the costs
would be $59 million per year.151 For
the primary cost estimate, the
Department assumes that 67.4 percent of
rollovers would be affected by the
proposed exemption.152 Under this
assumption, the costs would be $40
million per year.153 The Department
invites comments and data regarding the
number of rollovers affected by the
proposed exemption and the burden
hours associated with documenting the
basis for rollover recommendations. The
Department estimates that documenting
each rollover recommendation will take
a personal financial advisor 10
minutes,154 resulting in 203,447 155
burden hours and an equivalent cost
burden of $39,626,306.156
Annual Retrospective Review
Requirement
Under the internal retrospective
review requirement, a Financial
Institution is required to (1) conduct an
annual retrospective review reasonably
designed to assist the Financial
Institution in detecting and preventing
violations of, and achieving compliance
with the Impartial Conduct Standards
and their policies and procedures and
(2) produce a written report that is
certified by the Financial Institution’s
chief executive officer.
The Department understands that, as
per FINRA Rule 3110,157 FINRA Rule
3120,158 and FINRA Rule 3130,159
supra note 118.
supra note 119.
152 See supra note 120.
153 See supra note 121.
154 See supra note 122.
155 Burden hours are calculated by multiplying
the estimated number of rollovers affected by this
proposed exemption by the estimated hours needed
to document each recommendation.
156 The hourly cost burden is calculated as the
burden hour of each firm associated with meeting
the rollover documentation requirement multiplied
by the hourly wage of a personal financial advisor.
157 Rule 3110. Supervision, FINRA Manual,
www.finra.org/rules-guidance/rulebooks/finrarules/3110.
158 Rule 3120. Supervisory Control System,
FINRA Manual, www.finra.org/rules-guidance/
rulebooks/finra-rules/3120.
159 Rule 3130. Annual Certification of Compliance
and Supervisory Processes, FINRA Manual,
www.finra.org/rules-guidance/rulebooks/finrarules/3130.
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151 See
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40859
broker dealers are already held to a
standard functionally identical to that of
the retrospective review requirements of
this proposed exemption. Accordingly,
in this analysis, the Department
assumes that broker dealers will incur
minimal costs to meet this requirement.
In 2018, the Investment Adviser
Association estimated that 92 percent of
SEC-registered IAs voluntarily provide
an annual compliance program review
report to senior management.160 The
Department estimates that only 8
percent, or 538,161 of SEC-registered IAs
advising retirement plans would incur
costs associated with producing a
retrospective review report. Due to lack
of data, the Department assumes that
state-registered IAs exhibit similar
retrospective review patterns and
estimates that 8 percent, or 217,162 of
state-registered IAs would also incur
costs associated with producing a
retrospective review report.
As SEC-registered IAs are already
subject to SEC Rule 206(4)–7 the
Department assumes these IAs would
incur minimal costs to satisfy the
conditions related to this requirement.
Insurers in many states are already
subject state insurance law based on the
160 2018 Investment Management Compliance
Testing Survey, Investment Adviser Association
(Jun. 14, 2018), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/publications/2018Investment-Management_Compliance-TestingSurvey-Results-Webcast_pptx.pdf.
161 The SEC estimated that there were 12,940
SEC-registered IAs that were not dually registered
as BDs as of December 2018 (see Form CRS
Relationship Summary Release). The IAA
Compliance 2019 Survey estimates that 52 percent
of IAs have a pension consulting business. The IAA
Investment Management Compliance Testing
Survey estimates that 92 percent of SEC-registered
IAs provide an annual compliance program review
report to senior management. The estimated
number of IAs affected by this exemption who do
not meet the retrospective review requirement is the
product of the SEC’s estimate of SEC-registered IAs
in 2018, the IAA’s estimate of the percent of IAs
with a pension consulting business, and IAA’s
estimate of the percent of IA’s who do not provide
an annual compliance program review report.
162 The SEC estimated that there were 16,939
state-registered IAs that were not dually registered
as BDs as of December 2018 (see Form CRS
Relationship Summary Release). The NASAA 2019
estimates that 16 percent of state-registered IAs
have a pension consulting business. The IAA
Investment Management Compliance Testing
Survey estimates that 92 percent of SEC-registered
IAs provide an annual compliance program review
report to senior management. The Department
assumes state-registered IAs exhibit similar
retrospective review patterns as SEC-registered IAs.
The estimated number of state-registered IAs
affected by this exemption is the product of the
SEC’s estimate of state-registered IAs in 2018,
NASAA’s estimate of the percent of state-registered
IAs with a pension consulting business, and IAA’s
estimate of the percent of IA’s who do not provide
an annual compliance program review report.
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NAIC’s Model Regulation, 163 Thus, the
Department assumes that insurers
would incur negligible costs associated
with producing a retrospective review
report. This is estimated to take a legal
professional 5 hours for small firms and
10 hours for large firms, depending on
the nature of the business. This results
in an hour burden of 7,032 164 and an
equivalent cost burden of $973,297.165
In addition to conducting the audit
and producing a report, Financial
Institutions will need to review the
report and certify the exemption. This is
estimated to take a financial
professional 15 minutes for small firms
and 30 minutes for large firms,
depending on the nature of the business.
This results in an hour burden of
4,340 166 and an equivalent cost burden
of $718,806.167 The Department
welcomes any comments about burden
hours associated with producing an
annual review report and certifying it.
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Overall Summary
Overall, the Department estimates that
in order to meet the conditions of this
PTE, 11,782 Financial Institutions will
produce 1.8 million disclosures and
notices annually. These disclosures and
notices will result in 234,565 burden
hours during the first year and 217,253
burden hours in subsequent years, at an
equivalent cost of $43.9 million and
$41.5 million respectively. The
disclosures and notices in this
exemption will also result in a total cost
burden for materials and postage of
$94,954 annually.
These paperwork burden estimates
are summarized as follows:
• Type of Review: New collection
(Request for new OMB Control
Number).
• Agency: Employee Benefits Security
Administration, Department of Labor.
• Title: Improving Investment Advice
for Workers & Retirees.
• OMB Control Number: 1210–NEW.
163 NAIC Suitability in Annuity Transactions
Model Regulation, Spring 2020, Section 6.C.(2)(i),
available at https://www.naic.org/store/free/MDL275.pdf. (The same requirement is found in the
previous NAIC Suitability in Annuity Transactions
Model Regulation (2010), section 6.F.(1)(f).)
164 Burden hours are calculated by multiplying
the estimated number of each firm type by the
estimated time it will take each firm to review the
report and certify the exemption.
165 The hourly cost burden is calculated by
multiplying the burden hours for reviewing the
report and certifying the exemption requirement by
the hourly wage of a legal professional.
166 Burden hours are calculated by multiplying
the estimated number of each firm type by the
estimated time it will take each firm to review the
report and certify the exemption.
167 The hourly cost burden is calculated by
multiplying the burden hours for reviewing the
report and certifying the exemption requirement by
the hourly wage of a financial professional.
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• Affected Public: Business or other
for-profit institution.
• Estimated Number of Respondents:
11,782.
• Estimated Number of Annual
Responses: 1,811,099.
• Frequency of Response: Initially,
Annually, and when engaging in
exempted transaction.
• Estimated Total Annual Burden
Hours: 234,565 during the first year and
217,253 in subsequent years.
• Estimated Total Annual Burden
Cost: $94,954 during the first year and
$94,954 in subsequent years.
Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 168 imposes certain requirements
on rules subject to the notice and
comment requirements of section 553(b)
of the Administrative Procedure Act or
any other law.169 Under section 603 of
the RFA, agencies must submit an initial
regulatory flexibility analysis (IRFA) of
a proposal that is likely to have a
significant economic impact on a
substantial number of small entities,
such as small businesses, organizations,
and governmental jurisdictions. The
Department determines that this
proposed exemption will likely have a
significant economic impact on a
substantial number of small entities.
Therefore, the Department provides its
IRFA of the proposed exemption, below.
The Department welcomes comments
regarding this assessment.
Need for and Objectives of the Rule
As discussed earlier in this preamble,
the proposed class exemption would
allow investment advice fiduciaries to
receive compensation and engage in
transactions that would otherwise
violate the prohibited transaction
provisions of ERISA and the Code. As
such, the proposed exemption would
grant Financial Institutions and
Investment Professionals the flexibility
to address different business models,
and would lessen their overall
regulatory burden by coordinating
potentially overlapping regulatory
requirements. The exemption
conditions, including the Impartial
Conduct Standards and other conditions
supporting the standards, are expected
to provide protections to Retirement
Investors. Therefore, the Department
expects the proposed exemption to
benefit Retirement Investors that are
small entities and to provide efficiencies
to small Financial Institutions.
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169 5
U.S.C. 601 et seq.
U.S.C. 601(2), 603(a); see also 5 U.S.C. 551.
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Affected Small Entities
The Small Business Administration
(SBA),170 pursuant to the Small
Business Act,171 defines small
businesses and issues size standards by
industry. The SBA defines a small
business in the Financial Investments
and Related Activities Sector as a
business with up to $41.5 million in
annual receipts. Due to a lack of data
and shared jurisdictions, for purpose of
performing Regulatory Flexibility
Analyses pursuant to section 601(3) of
the Regulatory Flexibility Act, the
Department, after consultation with
SBA’s Office of Advocacy, defines small
entities included in this analysis
differently from the SBA definitions.172
For instance, in this analysis, the smallbusiness definitions for BDs and SECregistered IAs are consistent with the
SEC’s definitions, as these entities are
subject to the SEC’s rules as well as the
ERISA.173 As with SEC-registered IAs,
the size of state-registered IAs is
determined based on total value of the
assets they manage.174 The size of
insurance companies is based on annual
sales of annuities. The Department
requests comments on the
appropriateness of the size standard
used to evaluate the impact of the
proposed exemption on small entities.
In December 2018, there were 985
small-business BDs and 528 SECregistered, small-business IAs.175 The
Department estimates that
approximately 52 percent of these
small-businesses will be affected by the
proposed exemption.176 In December
2018, the Department estimates there
were approximately 10,840 small stateregistered IAs,177 of which about 1,700
170 13
CFR 121.201.
U.S.C. 631 et seq.
172 The Department consulted with the Small
Business Administration Office of Advocacy in
making this determination as required by 5 U.S.C.
603(c).
173 17 CFR parts 230, 240, 270, and 275, https://
www.sec.gov/rules/final/33-7548.txt.
174 Due to lack of available data, the Department
includes state-registered IAs managing assets less
than $30 million as small entities in this analysis.
175 See Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (Jul. 12,
2019).
176 2019 Investment Management Compliance
Testing Survey, Investment Adviser Association
(Jun. 18, 2019), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/about/190618_
IMCTS_slides_after_webcast_edits.pdf.
177 The SEC estimates there were approximately
17,000 state-registered IAs (see Form CRS
Relationship Summary; Amendments to Form ADV,
84 FR 33492 (Jul. 12, 2019)). The Department
estimates that about 64 percent of state-registered
IAs manage assets less than $30 million, and it
considers such entities small businesses. (See 2018
Investment Adviser Section Annual Report, North
171 15
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are estimated to be affected by the
proposed exemption.178 There were
approximately 386 insurers directly
writing annuities in 2018,179 316 of
which the Department estimates are
small entities.180 Table 1 summarizes
the distribution of affected entities by
size.
TABLE 1—DISTRIBUTION OF AFFECTED ENTITIES BY SIZE
BDs
State-registered IAs
Insurers
Small ................................
Large ................................
985
2,779
26%
74%
528
12,412
4%
96%
10,840
6,099
64%
36%
316
70
82%
18%
Total ..........................
3,764
100%
12,940
100%
16,939
100%
386
100%
Projected Reporting, Recordkeeping,
and Other Compliance Requirements
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SEC-registered IAs
As discussed above, the proposed
exemption would provide Financial
Institutions and Investment
Professionals with the flexibility to
choose between the new proposed
exemption or existing exemptions,
depending on their individual needs
and business models. Furthermore, the
proposed exemption would provide
Financial Institutions and Investment
Professionals broader, more flexible
prohibited transaction relief than is
currently available, while safeguarding
the interests of Retirement Investors. In
this regard, this proposed exemption
could present a less burdensome
compliance alternative for some
Financial Institutions because it would
allow them to streamline compliance
rather than rely on multiple exemptions
with multiple sets of conditions.
This proposed exemption simply
provides an additional alternative
pathway for Financial Institutions and
Investment Professionals to receive
compensation and engage in certain
transactions that would otherwise be
prohibited under ERISA and the Code.
Financial Institutions would incur costs
to comply with conditions set forth in
the proposed exemption. However, the
Department believes the costs associated
with those conditions would be modest
because the proposed exemption was
developed in consideration of other
regulatory conduct standards. The
Department believes that many
Financial Institutions and Investment
Professionals have already developed,
or are in the process of developing,
compliance structures for similar
regulatory standards. Therefore, the
Department does not believe the
proposed exemption will impose a
significant compliance burden on small
American Securities Administrators Association
(May 2018), www.nasaa.org/wp-content/uploads/
2018/05/2018-NASAA-IA-Report-Online.pdf.)
Therefore, the Department estimates there were
about 10,840 small, state-registered IAs.
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entities. For example, the Department
estimates that a small entity would
incur, on average, an additional $1,000
in compliance costs to meet the
conditions of the proposed exemption.
These additional costs would represent
0.4 percent of the net capital of BD with
$250,000. A BD with less than $500,000
in net capital is generally considered
small, according to the SEC.
Duplicate, Overlapping, or Relevant
Federal Rules
ERISA and the Code rules governing
advice on the investment of retirement
assets overlap with SEC rules that
govern the conduct of IAs and BDs who
advise retail investors. The Department
considered conduct standards set by
other regulators, such as SEC, state
insurance regulators, and FINRA, in
developing the proposed exemption,
with the goal of avoiding overlapping or
duplicative requirements. To the extent
the requirements overlap, compliance
with the other disclosure or
recordkeeping requirements can be used
to satisfy the exemption, provided the
conditions are satisfied. This would
lead to overall regulatory efficiency.
Significant Alternatives Considered
The RFA directs the Department to
consider significant alternatives that
would accomplish the stated objective,
while minimizing any significant
adverse impact on small entities.
External Audit
Under section II(d) of the proposed
exemption, Financial Institutions would
be required to conduct an annual
retrospective review that is reasonably
designed to detect and prevent
violations of, and achieve compliance
with, the Impartial Conduct Standards
and the institution’s own policies and
procedures. The Department considered
178 Of the small, state-registered IAs, the
Department estimates that 16 percent provide
advice or services to retirement plans (see 2019
Investment Adviser Section Annual Report, North
American Securities Administrators Association,
(May 2019)).
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the alternative of requiring a Financial
Institution to engage an independent
party to provide an external audit. The
Department elected not to propose this
requirement to avoid the increased costs
this approach would impose. Smaller
Financial Institutions may have been
disproportionately impacted by such
costs, which would have been contrary
to the Department’s goals of promoting
access to investment advice for
Retirement Investors. Further, the
Department is not convinced that an
independent, external audit would yield
useful information commensurate with
the cost, particularly to small entities.
Instead, the proposal requires that
Financial Institutions to document their
retrospective review, and provide it, and
supporting information, to the
Department and other regulators within
10 business days of such request.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 181 requires each
federal agency to prepare a written
statement assessing the effects of any
federal mandate in a proposed or final
rule that may result in an expenditure
of $100 million or more (adjusted
annually for inflation with the base year
1995) in any 1 year by state, local, and
tribal governments, in the aggregate, or
by the private sector. For purposes of
the Unfunded Mandates Reform Act, as
well as Executive Order 12875, this
proposed exemption does not include
any Federal mandate that will result in
such expenditures.
Federalism Statement
Executive Order 13132 outlines
fundamental principles of federalism. It
also requires federal agencies to adhere
to specific criteria in formulating and
implementing policies that have
‘‘substantial direct effects’’ on the states,
179 NAIC estimates that the number of insurers
directly writing annuities as of 2018 is 386.
180 LIMRA estimates in 2016, 70 insurers had
more than $38.5 million in sales. (See U.S.
Individual Annuity Yearbook: 2016 Data, LIMRA
Secure Retirement Institute (2017)).
181 Public Law 104–4, 109 Stat. 48 (1995).
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the relationship between the national
government and states, or on the
distribution of power and
responsibilities among the various
levels of government. Federal agencies
promulgating regulations that have
these federalism implications must
consult with state and local officials,
and describe the extent of their
consultation and the nature of the
concerns of state and local officials in
the preamble to the final regulation. The
Department does not believe this
proposed class exemption has
federalism implications because it has
no substantial direct effect on the states,
on the relationship between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government.
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
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 act prudently and discharge
his or her duties respecting the Plan
solely in the interests of the participants
and beneficiaries of the Plan.
Additionally, the fact that a transaction
is the subject of an exemption does not
affect the requirement of Code section
401(a) that the Plan must operate for the
exclusive benefit of the employees of
the employer maintaining the Plan and
their beneficiaries;
(2) Before the proposed exemption
may be granted under ERISA section
408(a) and Code section 4975(c)(2), the
Department must find that it is
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 the Plan and IRA
owners;
(3) If granted, the proposed exemption
is applicable to a particular transaction
only if the transaction satisfies the
conditions specified in the exemption;
and
(4) The proposed exemption, if
granted, is supplemental to, and not in
derogation of, any other provisions of
ERISA and the Code, including statutory
or administrative exemptions and
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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.
Improving Investment Advice for
Workers & Retirees
Section I—Transactions
(a) In general. ERISA and the Internal
Revenue Code prohibit fiduciaries, as
defined, that provide investment advice
to Plans and individual retirement
accounts (IRAs) from receiving
compensation that varies based on their
investment advice and compensation
that is paid from third parties. ERISA
and the Code also prohibit fiduciaries
from engaging in purchases and sales
with Plans or IRAs on behalf of their
own accounts (principal transactions).
This exemption permits Financial
Institutions and Investment
Professionals who provide fiduciary
investment advice to Retirement
Investors to receive otherwise
prohibited compensation and engage in
riskless principal transactions and
certain other principal transactions
(Covered Principal Transactions) as
described below. The exemption
provides relief from the prohibitions of
ERISA section 406(a)(1)(A), (D), and
406(b), and the sanctions imposed by
Code section 4975(a) and (b), by reason
of Code section 4975(c)(1)(A), (D), (E),
and (F), if the Financial Institutions and
Investment Professionals provide
fiduciary investment advice in
accordance with the conditions set forth
in Section II and are eligible pursuant to
Section III, subject to the definitional
terms and recordkeeping requirements
in Sections IV and V.
(b) Covered transactions. This
exemption permits Financial
Institutions and Investment
Professionals, and their affiliates and
related entities, to engage in the
following transactions, including as part
of a rollover from a Plan to an IRA as
defined in Code section 4975(e)(1)(B) or
(C), as a result of the provision of
investment advice within the meaning
of ERISA section 3(21)(A)(ii) and Code
section 4975(e)(3)(B):
(1) The receipt of reasonable
compensation; and
(2) The purchase or sale of an asset in
a riskless principal transaction or a
Covered Principal Transaction, and the
receipt of a mark-up, mark-down, or
other payment.
(c) Exclusions. This exemption does
not apply if:
(1) The Plan is covered by Title I of
ERISA and the Investment Professional,
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Financial Institution or any affiliate is
(A) the employer of employees covered
by the Plan, or (B) a named fiduciary or
plan administrator with respect to the
Plan that was selected to provide advice
to the Plan by a fiduciary who is not
independent of the Financial
Institution, Investment Professional, and
their affiliates; or
(2) The transaction is a result of
investment advice generated solely by
an interactive website in which
computer software-based models or
applications provide investment advice
based on personal information each
investor supplies through the website,
without any personal interaction or
advice with an Investment Professional
(i.e., robo-advice);
(3) The transaction involves the
Investment Professional acting in a
fiduciary capacity other than as an
investment advice fiduciary within the
meaning of the regulations at 29 CFR
2510.3–21(c)(1)(i) and (ii)(B) or 26 CFR
54.4975–9(c)(1)(i) and (ii)(B) setting
forth the test for fiduciary investment
advice.
Section II—Investment Advice
Arrangement
Section II requires Investment
Professionals and Financial Institutions
to comply with Impartial Conduct
Standards, including a best interest
standard, when providing fiduciary
investment advice to Retirement
Investors. In addition, the exemption
requires Financial Institutions to
acknowledge fiduciary status under
ERISA and/or the Code, and describe in
writing the services they will provide
and their material Conflicts of Interest.
Finally, Financial Institutions must
adopt policies and procedures
prudently designed to ensure
compliance with the Impartial Conduct
Standards when providing fiduciary
investment advice to Retirement
Investors and conduct a retrospective
review of compliance.
(a) Impartial Conduct Standards. The
Financial Institution and Investment
Professional comply with the following
‘‘Impartial Conduct Standards’’:
(1) Investment advice is, at the time
it is provided, in the Best Interest of the
Retirement Investor. As defined in
Section V(a), such advice 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
Retirement Investor, and does not place
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the financial or other interests of the
Investment Professional, Financial
Institution or any affiliate, related
entity, or other party ahead of the
interests of the Retirement Investor, or
subordinate the Retirement Investor’s
interests to their own;
(2)(A) The compensation received,
directly or indirectly, by the Financial
Institution, Investment Professional,
their affiliates and related entities for
their services does not exceed
reasonable compensation within the
meaning of ERISA section 408(b)(2) and
Code section 4975(d)(2); and (B) as
required by the federal securities laws,
the Financial Institution and Investment
Professional seek to obtain the best
execution of the investment transaction
reasonably available under the
circumstances; and
(3) The Financial Institutions’ and its
Investment Professionals’ statements to
the Retirement Investor about the
recommended transaction and other
relevant matters are not, at the time
statements are made, materially
misleading.
(b) Disclosure. Prior to engaging in a
transaction pursuant to this exemption,
the Financial Institution provides the
following disclosure to the Retirement
Investor:
(1) A written acknowledgment that
the Financial Institution and its
Investment Professionals are fiduciaries
under ERISA and the Code, as
applicable, with respect to any fiduciary
investment advice provided by the
Financial Institution or Investment
Professional to the Retirement Investor;
and
(2) A written description of the
services to be provided and the
Financial Institution’s and Investment
Professional’s material Conflicts of
Interest that is accurate and not
misleading in all material respects.
(c) Policies and Procedures.
(1) The Financial Institution
establishes, maintains and enforces
written policies and procedures
prudently designed to ensure that the
Financial Institution and its Investment
Professionals comply with the Impartial
Conduct Standards in connection with
covered fiduciary advice and
transactions.
(2) Financial Institutions’ policies and
procedures mitigate Conflicts of Interest
to the extent that the policies and
procedures, and the Financial
Institution’s incentive practices, when
viewed as a whole, are prudently
designed to avoid misalignment of the
interests of the Financial Institution and
Investment Professionals and the
interests of Retirement Investors in
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connection with covered fiduciary
advice and transactions.
(3) The Financial Institution
documents the specific reasons that any
recommendation to roll over assets from
a Plan to another Plan or IRA as defined
in Code section 4975(e)(1)(B) or (C),
from an IRA as defined in Code section
4975(e)(1)(B) or (C) to a Plan, from an
IRA to another IRA, or from one type of
account to another (e.g., from a
commission-based account to a feebased account) is in the Best Interest of
the Retirement Investor.
(d) Retrospective Review.
(1) The Financial Institution conducts
a retrospective review, at least annually,
that is reasonably designed to assist the
Financial Institution in detecting and
preventing violations of, and achieving
compliance with, the Impartial Conduct
Standards and the policies and
procedures governing compliance with
the exemption.
(2) The methodology and results of
the retrospective review are reduced to
a written report that is provided to the
Financial Institution’s chief executive
officer (or equivalent officer) and chief
compliance officer (or equivalent
officer).
(3) The Financial Institution’s chief
executive officer (or equivalent officer)
certifies, annually, that:
(A) The officer has reviewed the
report of the retrospective review;
(B) The Financial Institution has in
place policies and procedures prudently
designed to achieve compliance with
the conditions of this exemption; and
(C) The Financial Institution has in
place a prudent process to modify such
policies and procedures as business,
regulatory and legislative changes and
events dictate, and to test the
effectiveness of such policies and
procedures on a periodic basis, the
timing and extent of which is
reasonably designed to ensure
continuing compliance with the
conditions of this exemption.
(4) The review, report and
certification are completed no later than
six months following the end of the
period covered by the review.
(5) The Financial Institution retains
the report, certification, and supporting
data for a period of six years and makes
the report, certification, and supporting
data available to the Department, within
10 business days of request.
Section III—Eligibility
(a) General. Subject to the timing and
scope provisions set forth in subsection
(b), an Investment Professional or
Financial Institution will be ineligible to
rely on the exemption for 10 years
following:
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40863
(1) A conviction of any crime
described in ERISA section 411 arising
out of such person’s provision of
investment advice to Retirement
Investors, unless, in the case of a
Financial Institution, the Department
grants a petition pursuant to subsection
(c)(1) below that the Financial
Institution’s continued reliance on the
exemption would not be contrary to the
purposes of the exemption; or
(2) Receipt of a written ineligibility
notice issued by the Office of Exemption
Determinations for (A) engaging in a
systematic pattern or practice of
violating the conditions of this
exemption in connection with otherwise
non-exempt prohibited transactions; (B)
intentionally violating the conditions of
this exemption in connection with
otherwise non-exempt prohibited
transactions; or (C) providing materially
misleading information to the
Department in connection with the
Financial Institution’s conduct under
the exemption; in each case, as
determined by the Director of the Office
of Exemption Determinations pursuant
to the process described in subsection
(c).
(b) Timing and Scope of Ineligibility.
(1) An Investment Professional shall
become ineligible immediately upon (A)
the date of the trial court’s conviction of
the Investment Professional of a crime
described in subsection (a)(1), regardless
of whether that judgment remains under
appeal, or (B) the date of the Office of
Exemption Determinations’ written
ineligibility notice described in
subsection (a)(2), issued to the
Investment Professional.
(2) A Financial Institution shall
become ineligible following (A) the 10th
business day after the conviction of the
Financial Institution or another
Financial Institution in the same
Control Group of a crime described in
subsection (a)(1) regardless of whether
that judgment remains under appeal, or,
if the Financial Institution timely
submits a petition described in
subsection (c)(1) during that period,
upon the date of the Office of
Exemption Determination’s written
denial of the petition, or (B) the Office
of Exemption Determinations’ written
ineligibility notice, described in
subsection (a)(2), issued to the Financial
Institution or another Financial
Institution in the same Control Group.
(3) Control Group. A Financial
Institution is in a Control Group with
another Financial Institution if, directly
or indirectly, the Financial Institution
owns at least 80 percent of, is at least
80 percent owned by, or shares an 80
percent or more owner with, the other
Financial Institution. For purposes of
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this provision, if the Financial
Institutions are not corporations,
ownership is defined to include
interests in the Financial Institution
such as profits interest or capital
interests.
(4) Winding Down Period. Any
Financial Institution that is ineligible
will have a one-year winding down
period during which relief is available
under the exemption subject to the
conditions of the exemption other than
eligibility. After the one-year period
expires, the Financial Institution may
not rely on the relief provided in this
exemption for any additional
transactions.
(c) Opportunity to be heard.
(1) Petitions under subsection (a)(1).
(A) A Financial Institution that has
been convicted of a crime may submit
a petition to the Department informing
the Department of the conviction and
seeking a determination that the
Financial Institution’s continued
reliance on the exemption would not be
contrary to the purposes of the
exemption. Petitions must be submitted,
within 10 business days after the date of
the conviction, to the Director of the
Office of Exemption Determinations by
email at e-OED@dol.gov, or by certified
mail at Office of Exemption
Determinations, Employee Benefits
Security Administration, U.S.
Department of Labor, 200 Constitution
Avenue NW, Suite 400, Washington, DC
20210.
(B) Following receipt of the petition,
the Department will provide the
Financial Institution with the
opportunity to be heard, in person or in
writing or both. The opportunity to be
heard in person will be limited to one
in-person conference unless the
Department determines in its sole
discretion to allow additional
conferences.
(C) The Department’s determination
as to whether to grant the petition will
be based solely on its discretion. In
determining whether to grant the
petition, the Department will consider
the gravity of the offense; the
relationship between the conduct
underlying the conviction and the
Financial Institution’s system and
practices in its retirement investment
business as a whole; the degree to which
the underlying conduct concerned
individual misconduct, or, alternately,
corporate managers or policy; how
recent was the underlying lawsuit;
remedial measures taken by the
Financial Institution upon learning of
the underlying conduct; and such other
factors as the Department determines in
its discretion are reasonable in light of
the nature and purposes of the
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exemption. The Department will
provide a written determination to the
Financial Institution that articulates the
basis for the determination.
(2) Written ineligibility notice under
subsection (a)(2). Prior to issuing a
written ineligibility notice, the Director
of the Office of Exemption
Determinations will issue a written
warning to the Investment Professional
or Financial Institution, as applicable,
identifying specific conduct implicating
subsection (a)(2), and providing a sixmonth opportunity to cure. At the end
of the six-month period, if the
Department determines that the conduct
persists, it will provide the Investment
Professional or Financial Institution
with the opportunity to be heard, in
person or in writing or both, before the
Director of the Office of Exemption
Determinations issues the written
ineligibility notice. The opportunity to
be heard in person will be limited to
one in-person conference unless the
Department determines in its sole
discretion to allow additional
conferences. The written ineligibility
notice will articulate the basis for the
determination that the Investment
Professional or Financial Institution
engaged in conduct described in
subsection (a)(2).
(d) A Financial Institution or
Investment Professional that is
ineligible to rely on this exemption may
rely on a statutory prohibited
transaction exemption if one is available
or seek an individual prohibited
transaction exemption from the
Department. To the extent an applicant
seeks retroactive relief in connection
with an exemption application, the
Department will consider the
application in accordance with its
retroactive exemption policy as set forth
in 29 CFR 2570.35(d). The Department
may require additional prospective
compliance conditions as a condition of
retroactive relief.
Section IV—Recordkeeping
(a) The Financial Institution
maintains for a period of six years
records demonstrating compliance with
this exemption and makes such records
available, to the extent permitted by law
including 12 U.S.C. 484, to the
following persons or their authorized
representatives:
(1) Any authorized employee of the
Department;
(2) Any fiduciary of a Plan that
engaged in an investment transaction
pursuant to this exemption;
(3) Any contributing employer and
any employee organization whose
members are covered by a Plan that
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engaged in an investment transaction
pursuant to this exemption; or
(4) Any participant or beneficiary of a
Plan, or IRA owner that engaged in an
investment transaction pursuant to this
exemption.
(b)(1) None of the persons described
in subsection (a)(2)–(4) above are
authorized to examine records regarding
a recommended transaction involving
another Retirement Investor, privileged
trade secrets or privileged commercial
or financial information of the Financial
Institution, or information identifying
other individuals.
(2) Should the Financial Institution
refuse to disclose information to
Retirement Investors on the basis that
the information is exempt from
disclosure, the Financial Institution
must, by the close of the thirtieth (30th)
day following the request, provide a
written notice advising the requestor of
the reasons for the refusal and that the
Department may request such
information.
Section V—Definitions
(a) Advice is in a Retirement
Investor’s ‘‘Best Interest’’ if such advice
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
Retirement Investor, and does not place
the financial or other interests of the
Investment Professional, Financial
Institution or any affiliate, related
entity, or other party ahead of the
interests of the Retirement Investor, or
subordinate the Retirement Investor’s
interests to their own.
(b) A ‘‘Conflict of Interest’’ is an
interest that might incline a Financial
Institution or Investment Professional—
consciously or unconsciously—to make
a recommendation that is not in the Best
Interest of the Retirement Investor.
(c) A ‘‘Covered Principal Transaction’’
is a principal transaction that:
(1) For sales to a Plan or IRA:
(A) Involves a U.S. dollar
denominated debt security issued by a
U.S. corporation and offered pursuant to
a registration statement under the
Securities Act of 1933; a U.S. Treasury
Security; a debt security issued or
guaranteed by a U.S. federal government
agency other than the U.S. Department
of Treasury; a debt security issued or
guaranteed by a government-sponsored
enterprise; a municipal security; a
certificate of deposit; an interest in a
Unit Investment Trust; or any
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investment permitted to be sold by an
investment advice fiduciary to a
Retirement Investor under an individual
exemption granted by the Department
after the effective date of this exemption
that includes the same conditions as
this exemption, and
(B) If the recommended investment is
a debt security, the security is
recommended pursuant to written
policies and procedures adopted by the
Financial Institution that are reasonably
designed to ensure that the security, at
the time of the recommendation, has no
greater than moderate credit risk and
sufficient liquidity that it could be sold
at or near carrying value within a
reasonably short period of time; and
(2) For purchases from a Plan or IRA,
involves any securities or investment
property.
(d) ‘‘Financial Institution’’ means an
entity that is not disqualified or barred
from making investment
recommendations by any insurance,
banking, or securities law or regulatory
authority (including any self-regulatory
organization), that employs the
Investment Professional or otherwise
retains such individual as an
independent contractor, agent or
registered representative, and that is:
(1) Registered as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b–1 et seq.) or
under the laws of the state in which the
adviser maintains its principal office
and place of business;
(2) A bank or similar financial
institution supervised by the United
States or a state, or a savings association
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(as defined in section 3(b)(1) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(b)(1));
(3) An insurance company qualified
to do business under the laws of a state,
that: (A) Has obtained a Certificate of
Authority from the insurance
commissioner of its domiciliary state
which has neither been revoked nor
suspended; (B) has undergone and shall
continue to undergo an examination by
an independent certified public
accountant for its last completed taxable
year or has undergone a financial
examination (within the meaning of the
law of its domiciliary state) by the
state’s insurance commissioner within
the preceding 5 years, and (C) is
domiciled in a state whose law requires
that an actuarial review of reserves be
conducted annually and reported to the
appropriate regulatory authority;
(4) A broker or dealer registered under
the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.); or
(5) An entity that is described in the
definition of Financial Institution in an
individual exemption granted by the
Department after the date of this
exemption that provides relief for the
receipt of compensation in connection
with investment advice provided by an
investment advice fiduciary under the
same conditions as this class exemption.
(e) ‘‘Individual Retirement Account’’
or ‘‘IRA’’ means any account or annuity
described in Code section 4975(e)(1)(B)
through (F).
(f) ‘‘Investment Professional’’ means
an individual who:
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40865
(1) Is a fiduciary of a Plan or IRA by
reason of the provision of investment
advice described in ERISA section
3(21)(A)(ii) or Code section
4975(e)(3)(B), or both, and the
applicable regulations, with respect to
the assets of the Plan or IRA involved
in the recommended transaction;
(2) Is an employee, independent
contractor, agent, or representative of a
Financial Institution; and
(3) Satisfies the federal and state
regulatory and licensing requirements of
insurance, banking, and securities laws
(including self-regulatory organizations)
with respect to the covered transaction,
as applicable, and is not disqualified or
barred from making investment
recommendations by any insurance,
banking, or securities law or regulatory
authority (including any self-regulatory
organization).
(g) ‘‘Plan’’ means any employee
benefit plan described in ERISA section
3(3) and any plan described in Code
section 4975(e)(1)(A).
(h) ‘‘Retirement Investor’’ means—
(1) A participant or beneficiary of a
Plan with authority to direct the
investment of assets in his or her
account or to take a distribution;
(2) The beneficial owner of an IRA
acting on behalf of the IRA; or
(3) A fiduciary of a Plan or IRA.
Jeanne Klinefelter Wilson,
Acting Assistant Secretary, Employee Benefits
Security Administration, U.S. Department of
Labor.
[FR Doc. 2020–14261 Filed 7–2–20; 8:45 am]
BILLING CODE 4510–29–P
E:\FR\FM\07JYP3.SGM
07JYP3
]]>Agencies
[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Proposed Rules]
[Pages 40834-40865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14261]
[[Page 40833]]
Vol. 85
Tuesday,
No. 130
July 7, 2020
Part IV
Department of Labor
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Employee Benefits Security Administration
29 CFR Part 2550
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Improving Investment Advice for Workers & Retirees; Proposed Rule
Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 /
Proposed Rules
[[Page 40834]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12011]
ZRIN 1210-ZA29
Improving Investment Advice for Workers & Retirees
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Notification of Proposed Class Exemption.
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SUMMARY: This document gives notice of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974, as amended (ERISA), and the Internal
Revenue Code of 1986, as amended (the Code). The prohibited transaction
provisions of ERISA and the Code generally prohibit fiduciaries with
respect to employee benefit plans (Plans) and individual retirement
accounts and annuities (IRAs) from engaging in self-dealing and
receiving compensation from third parties in connection with
transactions involving the Plans and IRAs. The provisions also prohibit
purchasing and selling investments with the Plans and IRAs when the
fiduciaries are acting on behalf of their own accounts (principal
transactions). This proposed exemption would allow investment advice
fiduciaries under both ERISA and the Code to receive compensation,
including as a result of advice to roll over assets from a Plan to an
IRA, and to engage in principal transactions, that would otherwise
violate the prohibited transaction provisions of ERISA and the Code.
The exemption would apply to registered investment advisers, broker-
dealers, banks, insurance companies, and their employees, agents, and
representatives that are investment advice fiduciaries. The exemption
would include protective conditions designed to safeguard the interests
of Plans, participants and beneficiaries, and IRA owners. The new class
exemption would affect participants and beneficiaries of Plans, IRA
owners, and fiduciaries with respect to such Plans and IRAs.
DATES: Written comments and requests for a public hearing on the
proposed class exemption must be submitted to the Department within
August 6, 2020. The Department proposes that the exemption, if granted,
will be available 60 days after the date of publication of the final
exemption in the Federal Register.
ADDRESSES: All written comments and requests for a hearing concerning
the proposed class exemption should be sent to the Office of Exemption
Determinations through the Federal eRulemaking Portal and identified by
Application No. D-12011:
Federal eRulemaking Portal: www.regulations.gov at Docket ID
number: EBSA-2020-0003. Follow the instructions for submitting
comments.
See SUPPLEMENTARY INFORMATION below for additional information
regarding comments.
FOR FURTHER INFORMATION CONTACT: Susan Wilker, telephone (202) 693-
8557, or Erin Hesse, telephone (202) 693-8546, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor (these are not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Comment Instructions
All comments and requests for a hearing must be received by the end
of the comment period. Requests for a hearing must state the issues to
be addressed and include a general description of the evidence to be
presented at the hearing. In light of the current circumstances
surrounding the COVID-19 pandemic caused by the novel coronavirus which
may result in disruption to the receipt of comments by U.S. Mail or
hand delivery/courier, persons are encouraged to submit all comments
electronically and not to follow with paper copies. The comments and
hearing requests will be available for public inspection in the Public
Disclosure Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue NW,
Washington, DC 20210; however, the Public Disclosure Room may be closed
for all or a portion of the comment period due to circumstances
surrounding the COVID-19 pandemic caused by the novel coronavirus.
Comments and hearing requests will also be available online at
www.regulations.gov, at Docket ID number: EBSA-2020-0003 and
www.dol.gov/ebsa, at no charge.
Warning: All comments received will be included in the public
record without change and will be made available online at
www.regulations.gov, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information, but DO NOT submit information that you consider to
be confidential, or otherwise protected (such as Social Security number
or an unlisted phone number), or confidential business information that
you do not want publicly disclosed. However, if EBSA cannot read your
comment due to technical difficulties and cannot contact you for
clarification, EBSA might not be able to consider your comment.
Additionally, the www.regulations.gov website is an ``anonymous
access'' system, which means EBSA will not know your identity or
contact information unless you provide it. If you send an email
directly to EBSA without going through www.regulations.gov, your email
address will be automatically captured and included as part of the
comment that is placed in the public record and made available on the
internet.
Background
The Employee Retirement Income Security Act of 1974 (ERISA) section
3(21)(A)(ii) provides, in relevant part, that a person is a fiduciary
with respect to a Plan to the extent he or she renders investment
advice for a fee or other compensation, direct or indirect, with
respect to any moneys or other property of such Plan, or has any
authority or responsibility to do so. Internal Revenue Code (Code)
section 4975(e)(3)(B) includes a parallel provision that defines a
fiduciary of a Plan and an IRA. In 1975, the Department issued a
regulation establishing a five-part test for fiduciary status under
this provision of ERISA.\1\ The Department's 1975 regulation also
applies to the definition of fiduciary in the Code, which is identical
in its wording.\2\
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\1\ 29 CFR 2510.3-21(c)(1), 40 FR 50842 (October 31, 1975).
\2\ 26 CFR 54.4975-9(c), 40 FR 50840 (October 31, 1975).
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Under the 1975 regulation, for advice to constitute ``investment
advice,'' a financial institution or investment professional who is not
a fiduciary under another provision of the statute 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, Plan fiduciary or IRA owner that (4) the advice will serve as a
primary basis for investment decisions with respect to Plan or IRA
assets, and that (5) the
[[Page 40835]]
advice will be individualized based on the particular needs of the Plan
or IRA. A financial institution or investment professional that meets
this five-part test, and receives a fee or other compensation, direct
or indirect, is an investment advice fiduciary under ERISA and under
the Code.
Investment advice fiduciaries, like other fiduciaries to Plans and
IRAs, are subject to duties and liabilities established in Title I of
ERISA (ERISA) and Title II of ERISA (the Internal Revenue Code or the
Code). Under Title I of ERISA, plan fiduciaries must act prudently and
with undivided loyalty to employee benefit plans and their participants
and beneficiaries. Although these statutory fiduciary duties are not in
the Code, both ERISA and the Code contain provisions forbidding
fiduciaries from engaging in certain specified ``prohibited
transactions,'' involving Plans and IRAs, including conflict of
interest transactions.\3\ Under these prohibited transaction
provisions, a fiduciary may not deal with the income or assets of a
Plan or IRA in his or her own interest or for his or her own account,
and a fiduciary may not receive payments from any party dealing with
the Plan or IRA in connection with a transaction involving assets of
the Plan or IRA. The Department has authority to grant administrative
exemptions from the prohibited transaction provisions in ERISA and the
Code.\4\
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\3\ ERISA section 406 and Code section 4975.
\4\ ERISA section 408(a) and Code section 4975(c)(2).
Reorganization Plan No. 4 of 1978 (5 U.S.C. App. (2018)) generally
transferred the authority of the Secretary of the Treasury to grant
administrative exemptions under Code section 4975 to the Secretary
of Labor. These provisions require the Secretary to make the
following findings before granting an administrative exemption: (i)
The exemption is administratively feasible; (ii) the exemption is in
the interests of the Plans and IRAs and their participants and
beneficiaries, and (iii) the exemption is protective of the rights
of participants and beneficiaries of the Plans and IRAs. The
Department is proposing this new class exemption on its own motion
pursuant to ERISA section 408(a) and Code section 4975(c)(2), and in
accordance with procedures set forth in 29 CFR part 2570, subpart B
(76 FR 66637 (October 27, 2011)).
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In 2016, the Department finalized a new regulation that would have
replaced the 1975 regulation and it granted new associated prohibited
transaction exemptions. After that rulemaking was vacated by the U.S.
Court of Appeals for the Fifth Circuit in 2018,\5\ the Department
issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement
policy providing prohibited transaction relief to investment advice
fiduciaries.\6\ In the FAB, the Department stated it would not pursue
prohibited transactions claims against investment advice fiduciaries
who worked diligently and in good faith to comply with ``Impartial
Conduct Standards'' for transactions that would have been exempted in
the new exemptions, or treat the fiduciaries as violating the
applicable prohibited transaction rules. The Impartial Conduct
Standards have three components: A best interest standard; a reasonable
compensation standard; and a requirement to make no misleading
statements about investment transactions and other relevant matters.
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\5\ Chamber of Commerce of the United States v. U.S. Department
of Labor, 885 F.3d 360 (5th Cir. 2018). Elsewhere in this issue of
the Federal Register, the Department is publishing a technical
amendment related to the decision.
\6\ Available at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02. The Impartial
Conduct Standards incorporated in the FAB were conditions of the new
exemptions granted in 2016. See Best Interest Contract Exemption, 81
FR 21002 (Apr. 8, 2016), as corrected at 81 FR 44773 (July 11,
2016).
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This proposal takes into consideration the public correspondence
and comments received by the Department since February 2017 and
responds to informal industry feedback seeking an administrative class
exemption based on FAB 2018-02. As noted in the FAB, following the 2016
rulemaking many financial institutions created and implemented
compliance structures designed to ensure satisfaction of the Impartial
Conduct Standards. These parties were permitted to continue to rely on
those structures pending further guidance. Under the exemption,
financial institutions could continue relying on those compliance
structures on a permanent basis, subject to the additional conditions
of the exemption, rather than changing course to begin complying with
the Department's other existing exemptions for investment advice
fiduciaries. In addition, the exemption would provide a defense to
private litigation as well as enforcement action by the Department,
while the FAB is limited to the latter.
This new proposed exemption would provide relief that is broader
and more flexible than the Department's existing prohibited transaction
exemptions for investment advice fiduciaries. The Department's existing
exemptions generally provide relief for discrete, specifically
identified transactions, and they were not amended to clearly provide
relief for the compensation arrangements that developed over time.\7\
The exemption would provide additional certainty regarding covered
compensation arrangements and would avoid the complexity associated
with a financial institution relying on multiple exemptions when
providing investment advice.
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\7\ See e.g., PTE 86-128, Class Exemption for Securities
Transactions involving Employee Benefit Plans and Broker-Dealers, 51
FR 41686 (Nov. 18, 1986), as amended, 67 FR 64137 (Oct. 17,
2002)(providing relief for a fiduciary's use of its authority to
cause a Plan or IRA to pay a fee for effecting or executing
securities transactions to the fiduciary, as agent for the Plan or
IRA, and for a fiduciary to act as an agent in an agency cross
transaction for a Plan or IRA and another party to the transaction
and receive reasonable compensation for effecting or executing the
transaction from the other party to the tranaction); PTE 84-24 Class
Exemption for Certain Transactions Involving Insurance Agents and
Brokers, Pension Consultants, Insurance Companies, Investment
Companies and Investment Company Principal Underwriters, 49 FR 13208
(Apr. 3, 1984) , as corrected, 49 FR 24819 (June 15, 1984), as
amended, 71 FR 5887 (Feb. 3, 2006) (providing relief for the receipt
of a sales commission by an insurance agent or broker from an
insurance company in connection with the purchase, with plan assets,
of an insurance or annuity contract).
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The proposed exemption's principles-based approach is rooted in the
Impartial Conduct Standards for fiduciaries providing investment
advice. The proposed exemption includes additional conditions designed
to support the provision of investment advice that meets the Impartial
Conduct Standards. This notice also sets forth the Department's
interpretation of the five-part test of investment advice fiduciary
status and provides the Department's views on when advice to roll over
Plan assets to an IRA \8\ could be considered fiduciary investment
advice under ERISA and the Code.
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\8\ For purposes of any rollover of assets between a Plan and an
IRA described in this preamble, the term ``IRA'' only includes an
account or annuity described in Code section 4975(e)(1)(B) or (C).
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Since 2018, other regulators have considered enhanced standards of
conduct for investment professionals as a method of addressing
conflicts of interest. At the federal level, on June 5, 2019, the
Securities and Exchange Commission (SEC) finalized a regulatory package
relating to conduct standards for broker-dealers and investment
advisers. The package included Regulation Best Interest, which
establishes a best interest standard applicable to broker-dealers when
making a recommendation of any securities transaction or investment
strategy involving securities to retail customers.\9\ The SEC also
issued an interpretation of the conduct standards applicable to
registered investment advisers.\10\ As part of the package, the SEC
adopted new Form CRS, which requires broker-dealers and registered
investment advisers to provide retail
[[Page 40836]]
investors with a short relationship summary with specified information
(SEC Form CRS).\11\
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\9\ Regulation Best Interest: The Broker-Dealer Standard of
Conduct, 84 FR 33318 (July 12, 2019) (Regulation Best Interest
Release).
\10\ Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, 84 FR 33669 (July 12, 2019) (SEC Fiduciary
Interpretation).
\11\ Form CRS Relationship Summary; Amendments to Form ADV, 84
FR 33492 (July 12, 2019)(Form CRS Relationship Summary Release).
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State regulators and standards-setting bodies also have focused on
conduct standards. The New York State Department of Financial Services
has amended its insurance regulations to establish a best interest
standard in connection with life insurance and annuity
transactions.\12\ The Massachusetts Securities Division has amended its
regulations for broker-dealers to apply a fiduciary conduct standard,
under which broker-dealers and their agents must ``[m]ake
recommendations and provide investment advice without regard to the
financial or any other interest of any party other than the customer.''
\13\ The National Association of Insurance Commissioners has revised
its Suitability In Annuity Transactions Model Regulation to clarify
that all recommendations by agents and insurers must be in the best
interest of the consumer and that agents and carriers may not place
their financial interest ahead of in the consumer's interest in making
the recommendation.\14\
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\12\ New York State Department of Financial Services Insurance
Regulation 187, 11 NYCRR 224, First Amendment, effective August 1,
2019.
\13\ 950 Mass. Code Regs. 12.204 & 12.207 as amended effective
March 6, 2020.
\14\ NAIC Takes Action to Protect Annuity Consumers; available
at https://content.naic.org/article/news_release_naic_takes_action_protect_annuity_consumers.htm.
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The approach in this proposal includes Impartial Conduct Standards
that are, in the Department's view, aligned with those of the other
regulators. In this way, the proposal is designed to promote regulatory
efficiencies that might not otherwise exist under the Department's
existing administrative exemptions for investment advice fiduciaries.
This proposed exemption is expected to be an Executive Order (E.O.)
13771 deregulatory action because it would allow investment advice
fiduciaries with respect to Plans and IRAs to receive compensation and
engage in certain principal transactions that would otherwise be
prohibited under ERISA and the Code. The temporary enforcement policy
stated in FAB 2018-02 remains in place. The Department is proposing
this class exemption 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 (76 FR 66637 (October 27,
2011)).
Description of the Proposed Exemption
As discussed in greater detail below, the exemption proposed in
this notice would be available to registered investment advisers,
broker-dealers, banks, and insurance companies (Financial Institutions)
and their individual employees, agents, and representatives (Investment
Professionals) that provide fiduciary investment advice to Retirement
Investors. The proposal defines Retirement Investors as Plan
participants and beneficiaries, IRA owners, and Plan and IRA
fiduciaries.\15\ Under the exemption, Financial Institutions and
Investment Professionals could receive a wide variety of payments that
would otherwise violate the prohibited transaction rules, including,
but not limited to, commissions, 12b-1 fees, trailing commissions,
sales loads, mark-ups and mark-downs, and revenue sharing payments from
investment providers or third parties. The exemption's relief would
extend to prohibited transactions arising as a result of investment
advice to roll over assets from a Plan to an IRA, as detailed later in
this proposed exemption. The exemption also would allow Financial
Institutions to engage in principal transactions with Plans and IRAs in
which the Financial Institution purchases or sells certain investments
from its own account.
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\15\ The term ``Plan'' is defined for purposes of the exemption
as any employee benefit plan described in ERISA section 3(3) and any
plan described in Code section 4975(e)(1)(A). The term ``Individual
Retirement Account'' or ``IRA'' is defined as any account or annuity
described in Code section 4975(e)(1)(B) through (F), including an
Archer medical savings account, a health savings account, and a
Coverdell education savings account.
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As noted above, ERISA and the Code include broad prohibitions on
self-dealing. Absent an exemption, a fiduciary may not deal with the
income or assets of a Plan or IRA in his or her own interest or for his
or her own account, and a fiduciary may not receive payments from any
party dealing with the Plan or IRA in connection with a transaction
involving assets of the Plan or IRA. As a result, fiduciaries who use
their authority to cause themselves or their affiliates \16\ or related
entities \17\ to receive additional compensation violate the prohibited
transaction provisions unless an exemption applies.\18\
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\16\ For purposes of the exemption, an affiliate would include:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the Investment Professional or Financial Institution. (For this
purpose, ``control'' would mean the power to exercise a controlling
influence over the management or policies of a person other than an
individual) (2) Any officer, director, partner, employee, or
relative (as defined in ERISA section 3(15)), of the Investment
Professional or Financial Institution; and (3) Any corporation or
partnership of which the Investment Professional or Financial
Institution is an officer, director, or partner.
\17\ For purposes of the exemption, related entities would
include entities that are not affiliates, but in which the
Investment Professional or Financial Institution has an interest
that may affect the exercise of its best judgment as a fiduciary.
\18\ As articulated in the Department's regulations, ``a
fiduciary may not use the authority, control, or responsibility
which makes such a person a fiduciary to cause a plan to pay an
additional fee to such fiduciary (or to a person in which such
fiduciary has an interest which may affect the exercise of such
fiduciary's best judgment as a fiduciary) to provide a service.'' 29
CFR 2550.408b-2(e)(1).
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The proposed exemption would condition relief on the Investment
Professional and Financial Institution providing advice in accordance
with the Impartial Conduct Standards. In addition, the exemption would
require Financial Institutions to acknowledge in writing their and
their Investment Professionals' fiduciary status under ERISA and the
Code, as applicable, when providing investment advice to the Retirement
Investor, and to describe in writing the services to be provided and
the Financial Institutions' and Investment Professionals' material
conflicts of interest. Finally, Financial Institutions would be
required to adopt policies and procedures prudently designed to ensure
compliance with the Impartial Conduct Standards and conduct a
retrospective review of compliance. The exemption would also provide,
subject to additional safeguards, relief for Financial Institutions to
enter into principal transactions with Retirement Investors, in which
they purchase or sell certain investments from their own accounts.
The exemption requires Financial Institutions to provide reasonable
oversight of Investment Professionals and to adopt a culture of
compliance. The proposal further provides that Financial Institutions
and Investment Professionals would be ineligible to rely on the
exemption if, within the previous 10 years, they were convicted of
certain crimes arising out of their provision of investment advice to
Retirement Investors; they would also be ineligible if they engaged in
systematic or
[[Page 40837]]
intentional violation of the exemption's conditions or provided
materially misleading information to the Department in relation to
their conduct under the exemption. Ineligible parties could rely on an
otherwise available statutory exemption or apply for an individual
prohibited transaction exemption from the Department. This targeted
approach of allowing the Department to give special attention to
parties with certain criminal convictions or with a history of
egregious conduct with respect to compliance with the exemption should
provide significant protections for Retirement Investors while
preserving wide availability of investment advice arrangements and
products.
The proposed exemption would not expand Retirement Investors'
ability to enforce their rights in court or create any new legal claims
above and beyond those expressly authorized in ERISA, such as by
requiring contracts and/or warranty provisions.\19\
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\19\ ERISA section 502(a) provides the Secretary of Labor and
plan participants and beneficiaries with a cause of action for
fiduciary breaches and prohibited transactions with respect to
ERISA-covered Plans (but not IRAs). Code section 4975 imposes a tax
on disqualified persons participating in a prohibited transaction
involving Plans and IRAs (other than a fiduciary acting only as
such).
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Scope of Relief
Financial Institutions
The exemption would be available to entities that satisfy the
exemption's definition of a ``Financial Institution.'' The proposal
limits the types of entities that qualify as a Financial Institution to
SEC- and state-registered investment advisers, broker-dealers,
insurance companies and banks.\20\ The proposed definition is based on
the entities identified in the statutory exemption for investment
advice under ERISA section 408(b)(14) and Code section 4975(d)(17),
which are subject to well-established regulatory conditions and
oversight.\21\ Congress determined that this group of entities could
prudently mitigate certain conflicts of interest in their investment
advice through adherence to tailored principles under the statutory
exemption. The Department takes a similar approach here, and therefore
is proposing to include the same group of entities. To fit within the
definition of Financial Institution, the firm must not have been
disqualified or barred from making investment recommendations by any
insurance, banking, or securities law or regulatory authority
(including any self-regulatory organization).
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\20\ The proposal includes ``a bank or similar financial
institution supervised by the United States or a state, or a savings
association (as defined in section 3(b)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(b)(1)).'' The Department would
interpret this definition to extend to credit unions.
\21\ ERISA section 408(g)(11)(A) and Code section
4975(f)(8)(J)(i).
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The Department recognizes that different types of Financial
Institutions have different business models, and the proposal is
drafted to apply flexibly to these institutions.\22\ Broker-dealers,
for example, provide a range of services to Retirement Investors,
ranging from executing one-time transactions to providing personalized
investment recommendations, and they may be compensated on a
transactional basis such as through commissions.\23\ If broker-dealers
that are investment advice fiduciaries with respect to Retirement
Investors provide investment advice that affects the amount of their
compensation, they must rely on an exemption.
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\22\ Some of the Department's existing prohibited transaction
exemptions would also apply to the transactions described in the
next few paragraphs.
\23\ Regulation Best Interest Release, 84 FR at 33319.
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Registered investment advisers, by contrast, generally provide
ongoing investment advice and services and are commonly paid either an
assets under management fee or a fixed fee.\24\ If a registered
investment adviser is an investment advice fiduciary that charges only
a level fee that does not vary on the basis of the investment advice
provided, the registered investment adviser may not violate the
prohibited transaction rules.\25\ However, if the registered investment
adviser provides investment advice that causes itself to receive the
level fee, such as through advice to roll over Plan assets to an IRA,
the fee (including an ongoing management fee paid with respect to the
IRA) is prohibited under ERISA and the Code.\26\ Additionally, if a
registered investment adviser that is an investment advice fiduciary is
dually-registered as a broker-dealer, the registered investment adviser
may engage in a prohibited transaction if it recommends a transaction
that increases the broker-dealer's compensation, such as for execution
of securities transactions. As noted above, it is a prohibited
transaction for a fiduciary to use its authority to cause an affiliate
or related entity to receive additional compensation.\27\
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\24\ Id.
\25\ As noted above, fiduciaries who use their authority to
cause themselves or their affiliates or related entities to receive
additional compensation violate the prohibited transaction
provisions unless an exemption applies. 29 CFR 2550.408b-2(e)(1).
\26\ The Department has long interpreted the requirement of a
fee to broadly cover ``all fees or other compensation incident to
the transaction in which the investment advice to the plan has been
rendered or will be rendered.'' Preamble to the Department's 1975
Regulation, 40 FR 50842 (October 31, 1975). The Department's
analysis of the five-part test's application to rollovers is
discussed below.
\27\ 29 CFR 2550.408b-2(e)(1).
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Insurance companies commonly compensate insurance agents on a
commission basis, which generally creates prohibited transactions when
insurance agents are investment advice fiduciaries that provide
investment advice to Retirement Investors in connection with the sales.
However, the Department is aware that insurance companies often sell
insurance products and fixed (including indexed) annuities through
different distribution channels than broker-dealers and registered
investment advisers. While some insurance agents are employees of an
insurance company, other insurance agents are independent, and work
with multiple insurance companies. The proposed exemption would apply
to either of these business models. Insurance companies can supervise
independent insurance agents and they can also create oversight and
compliance systems through contracts with intermediaries such as
independent marketing organizations (IMOs), field marketing
organizations (FMOs) or brokerage general agencies (BGAs).\28\ Eligible
parties can also continue to use relief under the existing exemption
for insurance transactions, PTE 84-24, as an alternative.\29\ The
Department requests comment on these suggestions, and whether there are
alternatives for oversight of investment advice fiduciaries who also
serve as insurance agents.
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\28\ Although the proposal's definition of Financial Institution
does not include insurance intermediaries, the Department seeks
comments on whether the exemption should include insurance
intermediaries as Financial Institutions for the recommendation of
fixed (including indexed) annuity contracts. If so, the Department
asks parties to provide a definition of the type of intermediary
that should be permitted to operate as a Financial Institution and
whether any additional protective conditions might be necessary with
respect to the intermediary.
\29\ Class Exemption for Certain Transactions Involving
Insurance Agents and Brokers, Pension Consultants, Insurance
Companies, Investment Companies and Investment Company Principal
Underwriters, 49 FR 13208 (Apr. 3, 1984), as corrected, 49 FR 24819
(June 15, 1984), as amended, 71 FR 5887 (Feb. 3, 2006).
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Finally, banks and similar institutions would be permitted to act
as Financial Institutions under the exemption if they or their
employees are investment advice fiduciaries with respect to Retirement
Investors. The Department seeks comment on whether banks and their
employees provide investment advice to Retirement Investors, and if so,
whether the proposal needs
[[Page 40838]]
adjustment to address any unique aspects of their business models. The
Department seeks comment on other business models not listed here, and
invites commenters to explain whether other business models would be
appropriate to include in this framework.
The proposal also allows the definition of Financial Institution to
expand after the exemption is finalized based upon subsequent grants of
individual exemptions to additional entities that are investment advice
fiduciaries that meet the five-part test seeking to be treated as
covered Financial Institutions. Additional types of entities, such as
IMOs, FMOs, or BGAs, that are investment advice fiduciaries may
separately apply for relief for the receipt of compensation in
connection with the provision of investment advice on the same
conditions as apply to the Financial Institutions covered by the
proposed exemption.\30\ If the Department grants an individual
exemption under ERISA section 408(a) and Code section 4975(c) after the
date this exemption is granted, the expanded definition of Financial
Institution in the individual exemption would be added to this class
exemption so other entities that satisfy the definition could similarly
use the class exemption. The Department requests comment on the
procedural aspects, e.g., ensuring sufficient notice to Retirement
Investors, of this permitted expansion of the definition.
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\30\ Exemption relief for an insurance intermediary would only
be required if the intermediary is an investment advice fiduciary
under the applicable regulations. An exemption is not necessary for
an insurance intermediary or its insurance agents who conduct sales
transactions and are not fiduciaries under ERISA or the Code.
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The Department seeks comment on the definition of Financial
Institution in general and whether any other type of entity should be
included. The Department also seeks comment as to whether the
definition is overly broad, or whether Retirement Investors would
benefit from a narrowed list of Financial Institutions. In addition,
the Department requests comment on whether the definition of Financial
Institution is sufficiently broad to cover firms that render advice
with respect to investments in Health Savings Accounts (HSA), and about
the extent to which Plan participants receive investment advice in
connection with such accounts.
Investment Professionals
As defined in the proposal, an Investment Professional is an
individual who is a fiduciary of a Plan or IRA by reason of the
provision of investment advice, who is an employee, independent
contractor, agent or representative of a Financial Institution, and who
satisfies the federal and state regulatory and licensing requirements
of insurance, banking, and securities laws (including self-regulatory
organizations) with respect to the covered transaction, as applicable.
Similar to the definition of Financial Institution, this definition
also includes a requirement that the Investment Professional has not
been disqualified from making investment recommendations by any
insurance, banking, or securities law or regulatory authority
(including any self-regulatory organization).
Covered Transactions
The proposal would permit Financial Institutions and Investment
Professionals, and their affiliates and related entities, to receive
reasonable compensation as a result of providing fiduciary investment
advice. The exemption specifically covers compensation received as a
result of investment advice to roll over assets from a Plan to an IRA.
The exemption also would provide relief for a Financial Institution to
engage in the purchase or sale of an asset in a riskless principal
transaction or a Covered Principal Transaction, and receive a mark-up,
mark-down, or other payment. The exemption would provide relief from
ERISA section 406(a)(1)(A) and (D) and 406(b) and Code section
4975(c)(1)(A), (D), (E), and (F).\31\
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\31\ The proposal does not include relief from ERISA section
406(a)(1)(C) and Code section 4975(c)(1)(C). The statutory
exemptions, ERISA section 408(b)(2) and Code section 4975(d)(2)
provide this necessary relief for Plan or IRA service providers,
subject the applicable conditions.
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Subsection (1) of the exemption would provide broad relief for
Financial Institutions and Investment Professionals that are investment
advice fiduciaries to receive all forms of reasonable compensation as a
result of their investment advice to Retirement Investors. For example,
it would cover compensation received as a result of investment advice
to acquire, hold, dispose of, or exchange securities and other
investments. It would also cover compensation received as a result of
investment advice to take a distribution from a Plan or to roll over
the assets to an IRA, or from investment advice regarding other similar
transactions including (but not limited to) rollovers from one Plan to
another Plan, one IRA to another IRA, or from one type of account to
another account (e.g., from a commission-based account to a fee-based
account). The exemption would cover compensation received as a result
of investment advice as to persons the Retirement Investor may hire to
serve as an investment advice provider or asset manager.
Subsection (2) of the exemption would address the circumstance in
which the Financial Institution may, in addition to providing
investment advice, engage in a purchase or sale of an investment with a
Retirement Investor and receive a mark-up or a mark-down or similar
payment on the transaction. The exemption would extend to both riskless
principal transactions and Covered Principal Transactions. A riskless
principal transaction is a transaction in which a Financial
Institution, after having received an order from a Retirement Investor
to buy or sell an investment product, purchases or sells the same
investment product for the Financial Institution's own account to
offset the contemporaneous transaction with the Retirement Investor.
Covered Principal Transactions are defined in the exemption as
principal transactions involving certain specified types of
investments, discussed in more detail below. Principal transactions
that are not riskless and that do not fall within the definition of
Covered Principal Transaction would not be covered by the exemption.
The following sections provide additional information on the
proposal as it would apply to investment advice to roll over ERISA-
covered Plan assets to an IRA, and as it would apply to Covered
Principal Transactions.
Rollovers
Amounts accrued in an ERISA-covered Plan can represent a lifetime
of savings, and often comprise the largest sum of money a worker has at
retirement. Therefore, the decision to roll over ERISA-covered Plan
assets to an IRA is potentially a very consequential financial decision
for a Retirement Investor. For example, Retirement Investors may incur
transaction costs associated with moving the assets into new
investments and accounts, and, because of the loss of economies of
scale, the cost of investing through an IRA may be higher than through
a Plan.\32\ Retirement
[[Page 40839]]
Investors who roll out of ERISA-covered Plans also lose important ERISA
protections, including the benefit of a Plan fiduciary representing
their interests in selecting a menu of investment options or
structuring investment advice relationships, and the statutory causes
of action to protect their interests. Retirement Investors who are
retirees may not have the ability to earn additional amounts to offset
any costs or losses.
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\32\ See, e.g., ``IRA Investors Are Concentrated in Lower-Cost
Mutual Funds'' (Aug. 8, 2018), available at https://www.ici.org/viewpoints/view_18_ira_expenses_fees (``The data show that 401(k)
investors incur lower expense ratios in their mutual fund holdings
than IRA mutual fund investors. One reason for this is economies of
scale, as many employer plans aggregate the savings of hundreds or
thousands of workers, and often carry large average account
balances, which are more cost-effective to service. In addition,
employers that sponsor 401(k) plans may defray some of the costs of
running the plan, enabling the sponsor to select lower-cost funds
(or fund share classes) for the plan.'')
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Rollovers from ERISA-covered Plans to IRAs were expected to
approach $2.4 trillion cumulatively from 2016 through 2020.\33\ These
large sums of money eligible for rollover represent a significant
revenue source for investment advice providers. A firm that recommends
a rollover to a Retirement Investor can generally expect to earn
transaction-based compensation such as commissions, or an ongoing
advisory fee, from the IRA, but may or may not earn compensation if the
assets remain in the Plan.
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\33\ Cerulli Associates, ``U.S. Retirement Markets 2019.''
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In light of potential conflicts of interest related to rollovers
from Plans to IRAs, ERISA and the Code prohibit an investment advice
fiduciary from receiving fees resulting from investment advice to Plan
participants to roll over assets from a Plan to an IRA, unless an
exemption applies. The proposed exemption would provide relief, as
needed, for this prohibited transaction, if the Financial Institution
and Investment Professional provide investment advice that satisfies
the Impartial Conduct Standards and they comply with the other
applicable conditions discussed below.\34\ In particular, the Financial
Institution would be required to document the reasons that the advice
to roll over was in the Retirement Investor's best interest. In
addition, investment advice fiduciaries under Title I of ERISA would
remain subject to the fiduciary duties imposed by section 404 of that
statute.
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\34\ The exemption would also provide relief for investment
advice fiduciaries under either ERISA or the Code to receive
compensation for advice to roll Plan assets to another Plan, to roll
IRA assets to another IRA or to a Plan, and to transfer assets from
one type of account to another, all limited to the extent such
rollovers are permitted under law. The analysis set forth in this
section will apply as relevant to those transactions as well.
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In determining the fiduciary status of an investment advice
provider in this context, the Department does not intend to apply the
analysis in Advisory Opinion 2005-23A (the Deseret Letter), which
suggested that advice to roll assets out of a Plan did not generally
constitute investment advice. The Department believes that the analysis
in the Deseret Letter was incorrect and that advice to take a
distribution of assets from an ERISA-covered Plan is actually advice to
sell, withdraw, or transfer investment assets currently held in the
Plan. A recommendation to roll assets out of a Plan is necessarily a
recommendation to liquidate or transfer the Plan's property interest in
the affected assets, the participant's associated property interest in
the Plan investments, and the fiduciary oversight structure that
applies to the assets. Typically the assets, fees, asset management
structure, investment options, and investment service options all
change with the decision to roll money out of the Plan. Accordingly,
the better view is that a recommendation to roll assets out of a Plan
is advice with respect to moneys or other property of the Plan.
Moreover, a distribution recommendation commonly involves either advice
to change specific investments in the Plan or to change fees and
services directly affecting the return on those investments.\35\
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\35\ The SEC and FINRA have each recognized that recommendations
to roll over Plan assets to an IRA will almost always involve a
securities transaction. See Regulation Best Interest Release, 84 FR
at 33339; FINRA Regulatory Notice 13-45 Rollovers to Individual
Retirement Accounts (December 2013), available at https://www.finra.org/sites/default/files/NoticeDocument/p418695.pdf.
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All prongs of the five-part test must be satisfied for the
investment advice provider to be a fiduciary within the meaning of the
regulatory definition, including the ``regular basis'' prong and the
prongs requiring the advice to be provided pursuant to a ``mutual''
agreement, arrangement, or understanding that the advice will serve as
``a primary basis'' for investment decisions. As discussed below, these
inquiries will be informed by all the surrounding facts and
circumstances. The Department acknowledges that advice to take a
distribution from a Plan and roll over the assets may be an isolated
and independent transaction that would fail to meet the regular basis
prong.\36\ However, the Department believes that whether advice to roll
over Plan assets to an IRA satisfies the regular-basis prong of the
five-part test depends on the surrounding facts and circumstances. The
Department has long interpreted advice to a Plan to include advice to
participants and beneficiaries in participant-directed individual
account pension plans.\37\ The Department also recognizes that advice
to roll over Plan assets can occur as part of an ongoing relationship
or an anticipated ongoing relationship that an individual enjoys with
his or her advice provider. For example, in circumstances in which the
advice provider has been giving financial advice to the individual
about investing in, purchasing, or selling securities or other
financial instruments, the advice to roll assets out of a Plan is part
of an ongoing advice relationship that satisfies the ``regular basis''
requirement. Similarly, advice to roll assets out of the Plan into an
IRA where the advice provider will be regularly giving financial advice
regarding the IRA in the course of a more lengthy financial
relationship would be the start of an advice relationship that
satisfies the ``regular basis'' requirement. In these scenarios, there
is advice to the Plan--meaning the Plan participant or beneficiary--on
a regular basis. The Department is disinclined to propose an exemption
that would artificially exclude rollover advice from investment advice
when that would be contrary to the parties' course of dealing and
expectations. And it is more than reasonable, as discussed below, that
the advice provider would anticipate that advice about rolling over
Plan assets would be ``a primary basis for [those] investment
decisions.''
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\36\ Merely executing a sales transaction at the customer's
request also does not confer fiduciary status.
\37\ Interpretive Bulletin 96-1, 29 CFR 2509.96-1.
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This interpretation would both align the Department's approach with
other regulators and protect Plan participants and beneficiaries under
today's market practices, including the increasing prevalence of 401(k)
plans and self-directed accounts. Numerous sources acknowledge that a
common purpose of advice to roll over Plan assets is to establish an
ongoing relationship in which advice is provided on a regular basis
outside of the Plan, in return for a fee or other compensation. For
example, in a 2013 notice reminding firms of their responsibilities
regarding IRA rollovers, the Financial Industry Regulatory Authority
(FINRA) stated that ``a financial adviser has an economic incentive to
encourage an investor to roll Plan assets into an IRA that he will
represent as either a broker-dealer or an investment adviser
representative.'' \38\ Similarly, in 2011, the U.S. Government
Accountability Office (GAO) discussed the practice of cross-selling, in
which 401(k) service providers sell Plan participants products and
services outside of their Plans, including IRA rollovers. GAO reported
that industry professionals said
[[Page 40840]]
``cross-selling IRA rollovers to participants, in particular, is an
important source of income for service providers.'' \39\
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\38\ FINRA Regulatory Notice 13-45.
\39\ U.S. General Accountability Office, 401(k) Plans: Improved
Regulation Could Better Protect Participants from Conflicts of
Interest, GAO 11-119 (Washington, DC 2011), available at https://www.gao.gov/assets/320/315363.pdf.
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Therefore, the regular basis prong of the five-part test would be
satisfied when an entity with a pre-existing advice relationship with
the Retirement Investor advises the Retirement Investor to roll over
assets from a Plan to an IRA. Similarly, for an investment advice
provider who establishes a new relationship with a Plan participant and
advises a rollover of assets from the Plan to an IRA, the rollover
recommendation may be seen as the first step in an ongoing advice
relationship that could satisfy the regular basis prong of the five-
part test depending on the facts and circumstances.\40\
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\40\ The Department is aware that some Financial Institutions
pay unrelated parties to solicit clients for them. See Rule 206(4)-3
under the Investment Advisers Act of 1940; see also Investment
Advisers Advertisements; Compensation for Solicitations, Proposed
Rule, 84 FR 67518 (December 10, 2019). The Department notes that
advice by a paid solicitor to take a distribution from a Plan and to
roll over assets to an IRA could be part of ongoing advice to a
Retirement Investor, if the Financial Institution that pays the
solicitor provides ongoing fiduciary advice to the IRA owner.
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Further, the determination of whether there is a mutual agreement,
arrangement, or understanding that the investment advice will serve as
a primary basis for investment decisions is appropriately based on the
reasonable understanding of each of the parties, if no mutual agreement
or arrangement is demonstrated. Written statements disclaiming a mutual
understanding or forbidding reliance on the advice as a primary basis
for investment decisions are not determinative, although such
statements are appropriately considered in determining whether a mutual
understanding exists.
More generally, the Department emphasizes that the five-part test
does not look at whether the advice serves as ``the'' primary basis of
investment decisions, but whether it serves as ``a'' primary basis.
When financial service professionals make recommendations to a
Retirement Investor, particularly pursuant to a best interest standard
such as the one in the SEC's Regulation Best Interest, or another
requirement to provide advice based on the individualized needs of the
Retirement Investor, the parties typically should reasonably understand
that the advice will serve as at least a primary basis for the
investment decision. By contrast, a one-time sales transaction, such as
the one-time sale of an insurance product, does not by itself confer
fiduciary status under ERISA or the Code, even if accompanied by a
recommendation that the product is well-suited to the investor and
would be a valuable purchase.\41\
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\41\ Like other Investment Professionals, however, insurance
agents may have or contemplate an ongoing advice relationship with a
customer. For example, agents who receive trailing commissions on
annuity transactions may continue to provide ongoing recommendations
or service with respect to the annuity.
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In addition to satisfying the five-part test, a person must receive
a fee or other compensation to be an investment advice fiduciary. The
Department has long interpreted this requirement broadly to cover ``all
fees or other compensation incident to the transaction in which the
investment advice to the plan has been rendered or will be rendered.''
\42\ The Department previously noted that ``this may include, for
example, brokerage commissions, mutual fund sales commissions, and
insurance sales commissions.'' \43\ In the rollover context, fees and
compensation received from transactions involving rollover assets would
be incident to the advice to take a distribution from the Plan and to
roll over the assets to an IRA. If, under the above analysis, advice to
roll over Plan assets to an IRA is fiduciary investment advice under
ERISA, the fiduciary duties of prudence and loyalty would apply to the
initial instance of advice to take the distribution and to roll over
the assets. Fiduciary investment advice concerning investment of the
rollover assets and ongoing management of the assets, once distributed
from the Plan into the IRA, would be subject to obligations in the
Code. For example, a broker-dealer who satisfies the five-part test
with respect to a Retirement Investor, advises that Retirement Investor
to move his or her assets from a Plan to an IRA, and receives any fees
or compensation incident to distributing those assets, will be a
fiduciary subject to ERISA, including section 404, with respect to the
advice regarding the rollover.
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\42\ Preamble to the Department's 1975 Regulation, 40 FR 50842
(October 31, 1975).
\43\ Id.
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The Department requests comment on all aspects of this part of its
proposal. For instance: Are there other rollover scenarios that are not
clear and which the Department should address? Does the discussion
above reflect real-world experiences and concerns? Does it provide
enough clarity to financial entities interested in the proposed
exemption?
Principal Transactions
Principal transactions involve the purchase from, or sale to, a
Plan or IRA, of an investment, on behalf of the Financial Institution's
own account or the account of a person directly or indirectly, through
one or more intermediaries, controlling, controlled by, or under common
control with the Financial Institution. Because an investment advice
fiduciary engaging in a principal transaction is on both sides of the
transaction, the firm has a clear conflict. In addition, the securities
typically traded in principal transactions often lack pre-trade price
transparency and Retirement Investors may, therefore, have difficulty
evaluating the fairness of a particular principal transaction. These
investments also can be associated with low liquidity, low
transparency, and the possible incentive to sell unwanted investments
held by the Financial Institution.
Consistent with the Department's historical approach to prohibited
transaction exemptions for fiduciaries, this proposal includes relief
for principal transactions that is limited in scope and subject to
additional conditions, as set forth in the definition of Covered
Principal Transactions, described below. Importantly, certain
transactions would not be considered principal transactions for
purposes of the exemption, and so could occur under the more general
conditions. This includes the sale of an insurance or annuity contract,
or a mutual fund transaction.
Principal transactions that are ``riskless principal transactions''
would be covered under the exemption as well, subject to the general
conditions. A riskless principal transaction is a transaction in which
a Financial Institution, after having received an order from a
Retirement Investor to buy or sell an investment product, purchases or
sells the same investment product in a contemporaneous transaction for
the Financial Institution's own account to offset the transaction with
the Retirement Investor. The Department requests comment on whether the
exemption text should include a definition of the terms ``principal
transaction'' and ``riskless principal transaction.''
The proposal uses the defined term ``Covered Principal
Transaction'' to describe the types of non-riskless principal
transactions that would be covered under the exemption. For purchases
from a Plan or IRA, the term is broadly defined to include any
securities or other investment property.
[[Page 40841]]
This is to reflect the possibility that a principal transaction will be
needed to provide liquidity to a Retirement Investor. However, for
sales to a Plan or IRA, the proposed exemption would provide more
limited relief. For those sales, the definition of Covered Principal
Transaction would be limited to transactions involving: corporate debt
securities offered pursuant to a registration statement under the
Securities Act of 1933; U.S. Treasury securities; debt securities
issued or guaranteed by a U.S. federal government agency other than the
U.S. Department of Treasury; debt securities issued or guaranteed by a
government-sponsored enterprise (GSE); municipal bonds; certificates of
deposit; and interests in Unit Investment Trusts. The Department seeks
comment on whether any of these investments should be further defined
for clarity.
The Department intends for this exemption to accommodate new and
additional investments, as appropriate. Accordingly, the definition of
Covered Principal Transaction is designed to expand to include
additional investments if the Department grants an individual exemption
that provides relief for investment advice fiduciaries to sell the
investment to a Retirement Investor in a principal transaction, under
the same conditions as this class exemption.
For sales of a debt security to a Plan or IRA, the definition of
Covered Principal Transaction would require the Financial Institution
to adopt written policies and procedures related to credit quality and
liquidity. Specifically, the policies and procedures must be reasonably
designed to ensure that the debt security, at the time of the
recommendation, has no greater than moderate credit risk and has
sufficient liquidity that it could be sold at or near its carrying
value within a reasonably short period of time. This standard is
intended to identify investment grade securities, and is included to
prevent the exemption from being available to Financial Institutions
that recommend speculative debt securities from their own accounts.
The proposal is broader than the scope of FAB 2018-02, which did
not include principal transactions involving municipal bonds. The
Department cautions, however, that Financial Institutions and
Investment Professionals should pay special care to the reasons for
advising Retirement Investors to invest in municipal bonds. Tax-exempt
municipal bonds are often a poor choice for investors in ERISA plans
and IRAs because the plans and IRAs are already tax advantaged and,
therefore, do not benefit from paying for the bond's tax-favored
status.\44\ Financial Institutions and Investment Professionals may
wish to document the reasons for any recommendation of a tax-exempt
municipal bond and why the recommendation, despite the tax
consequences, was in the Retirement Investor's best interest.
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\44\ See e.g., Seven Questions to Ask When Investing in
Municipal Bonds, available at https://www.msrb.org/~/media/pdfs/
msrb1/pdfs/seven-questions-when-investing.ashx. (``[T]ax-exempt
bonds may not be an efficient investment for certain tax advantaged
accounts, such as an IRA or 401k, as the tax-advantages of such
accounts render the tax-exempt features of municipal bonds
redundant. Furthermore, since withdrawals from most of those
accounts are subject to tax, placing a tax exempt bond in such an
account has the effect of converting tax-exempt income into taxable
income. Finally, if an investor purchases bonds in the secondary
market at a discount, part of the gain received upon sale may be
subject to regular income tax rates rather than capital gains
rates.'')
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The Department seeks public comment on all aspects of the
proposal's treatment of principal transactions, including the proposal
to provide relief in this exemption for principal transactions
involving municipal bonds. Do commenters believe that the exemption
should extend to principal transactions involving municipal bonds? Do
commenters believe the definition of municipal bonds should be limited
to taxable municipal bonds? Should the exemption include any additional
safeguards for these transactions? Are there any other transactions
that would benefit from special care before making a recommendation in
addition to municipal bonds? The Department requests comments on
whether its proposed mechanism for including new and additional
investments through later, individual exemptions provides sufficient
flexibility.
Exclusions
Section I(c) provides that certain specific transactions would be
excluded from the exemption. Under Section I(c)(1), the exemption would
not extend to transactions involving ERISA-covered Plans if the
Investment Professional, Financial Institution, or an affiliate is
either (1) the employer of employees covered by the Plan, or (2) is a
named fiduciary or plan administrator, or an affiliate thereof, who was
selected to provide advice to the Plan by a fiduciary who is not
independent of the Financial Institution, Investment Professional, and
their affiliates. The Department is of the view that, to protect
employees from abuse, employers generally should not be in a position
to use their employees' retirement benefits as potential revenue or
profit sources, without additional safeguards. Employers can always
render advice and recover their direct expenses in transactions
involving their employees without need of an exemption.\45\ Further,
the Department does not intend for the exemption to be used by a
Financial Institution or Investment Professional that is the named
fiduciary or plan administrator of a Plan or an affiliate thereof,
unless the Financial Institution or Investment Professional is selected
as an advice provider by a party that is independent of them.\46\ Named
fiduciaries and plan administrators have significant authority over
Plan operations and accordingly, the Department believes that any
selection of these parties to also provide investment advice to the
Plan or its participants and beneficiaries should be made by an
independent party who will also monitor the performance of the
investment advice services.
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\45\ ERISA section 408(b)(5) provides a statutory exemption for
the purchase of life insurance, health insurance, or annuities, from
an employer with respect to a Plan or a wholly-owned subsidiary of
the employer.
\46\ For purposes of this exemption, the Department would view a
party as independent of the Financial Institution and Investment
Professional if: (i) The person was not the Financial Institution,
Investment Professional or an affiliate, (ii) the person did not
have a relationship to or an interest in the Financial Institution,
Investment Professional or any affiliate that might affect the
exercise of the person's best judgment in connection with
transactions covered by the exemption, and (iii) the party does not
receive and is not projected to receive within the current federal
income tax year, compensation or other consideration for his or her
own account from the Financial Institution, Investment Professional
or an affiliate, in excess of 2% of the person's annual revenues
based upon its prior income tax year.
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As reflected in Section I(c)(2), the exemption also would not
extend to transactions that result from robo-advice arrangements that
do not involve interaction with an Investment Professional. Congress
previously granted statutory relief for investment advice programs
using computer models in ERISA sections 408(b)(14) and 408(g) and Code
sections 4975(d)(17) and 4975(f)(8) and the Department has promulgated
applicable regulations thereunder.\47\ Thus, while ``hybrid'' robo-
advice arrangements \48\ would be permitted under the exemption,
arrangements in which the only investment advice provided is generated
by a computer model would not be eligible for relief under the
exemption. The Department requests comment on whether additional relief
is needed for robo-advice arrangements which do not
[[Page 40842]]
involve interaction with an Investment Professional.
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\47\ 29 CFR 2550.408g-1.
\48\ Hybrid robo-advice arrangements involve both computer
software-based models and personal investment advice from an
Investment Professional.
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Finally, under Section I(c)(3), the exemption would not extend to
transactions in which the Investment Professional is acting in a
fiduciary capacity other than as an investment advice fiduciary. This
is consistent with FAB 2018-02, which applied to investment advice
fiduciaries. For clarity, Section I(c)(3) cites to the Department's
five-part test as the governing authority for status as an investment
advice fiduciary.
Exemption Conditions
Section II of the proposal sets forth the general conditions that
would be included in the exemption. Section III establishes the
eligibility requirements. Section IV would require parties to maintain
records to demonstrate compliance with the exemption. Section V
includes the defined terms used in the exemption. These sections are
discussed below. In order to avoid a prohibited transaction, the
Financial Institution and Investment Professional would have to comply
with all of the conditions of the exemption, and could not waive or
disclaim compliance with any of the conditions. Similarly, a Retirement
Investor could not agree to waive any of the conditions.
Investment Advice Arrangement (Section II)
Section II sets forth conditions that would govern the Financial
Institution's and Investment Professionals' provision of investment
advice. As discussed in greater detail below, Section II(a) would
require Financial Institutions and Investment Professionals to comply
with the Impartial Conduct Standards by providing advice that is in
Retirement Investors' best interest, charging only reasonable
compensation, and making no materially misleading statements about the
investment transaction and other relevant matters. The Impartial
Conduct Standards would further require the Financial Institution and
Investment Professional to seek to obtain the best execution of the
investment transaction reasonably available under the circumstances, as
required by the federal securities laws.
Section II(b) would require Financial Institutions, prior to
engaging in a transaction pursuant to the exemption, to provide a
written disclosure to the Retirement Investor acknowledging that the
Financial Institution and its Investment Professionals are fiduciaries
under ERISA and the Code, as applicable.\49\ The disclosure also would
be required to provide a written description, accurate in all material
respects regarding the services to be provided and the Financial
Institution's and Investment Professional's material conflicts of
interest. Under Section II(c), the Financial Institution would be
required to establish, maintain and enforce written policies and
procedures prudently designed to ensure that the Financial Institution
and its Investment Professionals comply with the Impartial Conduct
Standards. Section II(d) would require Financial Institutions to
conduct an annual retrospective review.
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\49\ As noted above, the Department does not intend the
exemption to expand Retirement Investors' ability, such as by
requiring contracts and/or warranty provisions, to enforce their
rights in court or create any new legal claims above and beyond
those expressly authorized in ERISA. Neither does the Department
believe the exemption would create any such expansion.
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Best Interest Standard
As defined in Section V(a), the proposed best interest standard
would be satisfied if investment advice ``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 Retirement Investor, and does
not place the financial or other interest of the Investment
Professional, Financial Institution or any affiliate, related entity or
other party ahead of the interests of the Retirement Investor, or
subordinate the Retirement Investor's interests to their own.''
This proposed best interest standard is based on longstanding
concepts derived from ERISA and the high fiduciary standards developed
under the common law of trusts, and is intended to comprise objective
standards of care and undivided loyalty, consistent with the
requirements of ERISA section 404.\50\ 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 interests, and accordingly are well-suited to the problems
posed by conflicted investment advice.
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\50\ Cf. also Code section 4975(f)(5), which defines
``correction'' with respect to prohibited transactions as placing a
Plan or IRA in a financial position not worse that it would have
been in if the person had acted ``under the highest fiduciary
standards.'' While the Code does not expressly impose a duty of
loyalty on fiduciaries, the best interest standard proposed here is
intended to ensure adherence to the ``highest fiduciary standards''
when a fiduciary advises a Plan or IRA owner under the Code.
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The proposal's standard of care is an objective standard that would
require the Financial Institution and Investment Professional to
investigate and evaluate investments, provide advice, and exercise
sound judgment in the same way that knowledgeable and impartial
professionals would.\51\ Thus, an Investment Professional's and
Financial Institution's advice would be measured against that of a
prudent Investment Professional. As indicated in the text, the standard
of care is measured at the time the advice is provided, and not in
hindsight.\52\ The standard would not measure compliance by reference
to how investments subsequently performed or turn Financial
Institutions and Investment Professionals into guarantors of investment
performance; rather, the appropriate measure is whether the Investment
Professional gave advice that was prudent and in the best interest of
the Retirement Investor at the time the advice is provided.
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\51\ See Regulation Best Interest Care Obligation, 17 CFR
240.15l-1(a)(2)(ii); Regulation Best Interest Release, 84 FR at
33321 (Under the Care Obligation, ``[t]he broker-dealer must
understand potential risks, rewards, and costs associated with the
recommendation.''); id., at 33326 (``We are adopting the Care
Obligation largely as proposed; however, we are expressly requiring
that a broker-dealer understand and consider the potential costs
associated with its recommendation, and have a reasonable basis to
believe that the recommendation does not place the financial or
other interest of the broker-dealer ahead of the interest of the
retail customer.''); id. at 33376 & n. 598 (discussing the Care
Obligation in the context of complex or risky securities and
investment strategies; citing FINRA Regulatory Notice 17-32 as
explaining that ``[t]he level of reasonable diligence that is
required will rise with the complexity and risks associated with the
security or strategy. With regard to a complex product such as a
volatility-linked [Exchange Traded Product], an associated person
should be capable of explaining, at a minimum, the product's main
features and associated risks.'').
\52\ See Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir.
1983).
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The proposal articulates the best interest standard as the
Financial Institutions' and Investment Professionals' duty to ``not
place the financial or other interest of the Investment Professional,
Financial Institution or any affiliate, related entity or other party
ahead of the interests of the Retirement Investor, or subordinate the
Retirement Investor's interests to their own.'' The standard is to be
interpreted and applied consistent with the standard set forth in the
SEC's Regulation Best Interest \53\ and the SEC's
[[Page 40843]]
interpretation regarding the conduct standard for registered investment
advisers.54 55
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\53\ Regulation Best Interest's best interest obligation
provides that a ``broker, dealer, or a natural person who is an
associated person of a broker or dealer, when making a
recommendation of any securities transaction or investment strategy
involving securities (including account recommendations) to a retail
customer, shall act in the best interest of the retail customer at
the time the recommendation is made, without placing the financial
or other interest of the broker, dealer, or natural person who is an
associated person of a broker or dealer making the recommendation
ahead of the interest of the retail customer.'' 17 CFR 240.15l-
1(a)(1).
\54\ ``An investment adviser's fiduciary duty under the Advisers
Act comprises a duty of care and a duty of loyalty. This fiduciary
duty requires an adviser `to adopt the principal's goals,
objectives, or ends.' This means the adviser must, at all times,
serve the best interest of its client and not subordinate its
client's interest to its own. In other words, the investment adviser
cannot place its own interests ahead of the interests of its
client.'' SEC Fiduciary Interpretation, 84 FR at 33671(citations
omitted).
\55\ The NAIC's updated Suitability in Annuity Transactions
Model Regulation includes a safe harbor for recommendations made by
financial professionals that are ERISA and Code fiduciaries in
compliance with the duties, obligations, prohibitions and all other
requirements attendant to such status under ERISA and the Code. NAIC
Suitability in Annuity Transactions Model Regulation, Spring 2020,
Section 6.E.(5)(c), available at https://www.naic.org/store/free/MDL-275.pdf.
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This best interest standard would allow Investment Professionals
and Financial Institutions to provide investment advice despite having
a financial or other interest in the transaction, so long as they do
not place the interests ahead of the interests of the Retirement
Investor, or subordinate the Retirement Investor's interests to their
own. For example, in choosing between two investments equally available
to the investor, it would not be permissible for the Investment
Professional to advise investing in the one that is worse for the
Retirement Investor because it is better for the Investment
Professional's or the Financial Institution's bottom line. Because the
standard does not forbid the Financial Institution or Investment
Professional from having an interest in the transaction this standard
would not foreclose the Investment Professional and Financial
Institution from being paid, nor would it foreclose investment advice
on proprietary products or investments that generate third party
payments.
The best interest standard in this proposal would not impose an
unattainable obligation on Investment Professionals and Financial
Institutions to somehow identify the single ``best'' investment for the
Retirement Investor out of all the investments in the national or
international marketplace, assuming such advice were even possible at
the time of the transaction. The obligation under the best interest
standard would be to give advice that adheres to professional standards
of prudence, and that does not place the interests of the Investment
Professional, Financial Institution, or other party ahead of the
Retirement Investor's financial interests, or subordinate the
Retirement Investor's interests to those of the Investment Professional
or Financial Institution.
Neither the best interest standard nor any other condition of the
exemption would establish a monitoring requirement for Financial
Institutions or Investment Professionals; the parties can, of course,
establish a monitoring obligation by agreement, arrangement, or
understanding. Under Section II(b), discussed below, Financial
Institutions would, however, be required to disclose which services
they will provide. Moreover, Financial Institutions should carefully
consider whether certain investments can be prudently recommended to
the individual Retirement Investor in the first place without ongoing
monitoring of the investment. Investments that possess unusual
complexity and risk, for example, may require ongoing monitoring to
protect the investor's interests. An Investment Professional may be
unable to satisfy the exemption's best interest standard with respect
to such investments without a mechanism in place for monitoring. The
added cost of monitoring such investments should also be considered by
the Financial Institution and Investment Professional in determining
whether the recommended investments are in the Retirement Investor's
best interest. The Department requests comments on this best interest
standard and whether additional examples would be useful.
Reasonable Compensation
General
Section II(a)(2) of the exemption would establish a reasonable
compensation standard. Compensation received, directly or indirectly,
by the Financial Institution, Investment Professional, and their
affiliates and related entities for their services would not be
permitted to exceed reasonable compensation 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 has been long recognized under ERISA and the Code.
ERISA section 408(b)(2) and Code section 4975(d)(2) expressly require
all types of services arrangements involving Plans and IRAs to result
in no more than reasonable compensation to the service provider.
Investment Professionals and Financial Institutions--as service
providers--have long been subject to this requirement, regardless of
their fiduciary status. The reasonable compensation standard requires
that compensation not be excessive, as measured by the market value of
the particular services, rights, and benefits the Investment
Professional and Financial Institution are delivering to the Retirement
Investor. Given the conflicts of interest associated with the
commissions and other payments that would be covered by the exemption,
and the potential for self-dealing, it is particularly important that
Investment Professionals and Financial Institutions adhere to these
statutory standards, which are rooted in common law principles.
In general, the reasonableness of fees will depend on the
particular facts and circumstances at the time of the recommendation.
Several factors inform whether compensation is reasonable, including
the market price of service(s) provided and/or 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. Under the
exemption, the Financial Institution and Investment Professional would
not have to recommend the transaction that is the lowest cost or that
generates the lowest fees without regard to other relevant factors.
Recommendations of the ``lowest cost'' security or investment strategy,
without consideration of other factors, could in fact violate the
exemption.
The reasonable compensation standard would apply to all
transactions under the exemption, including investment products that
bundle together services and investment guarantees or other benefits,
such as annuities. In assessing the reasonableness of compensation in
connection with these products, it is appropriate to consider the value
of the guarantees and benefits as well as the value of the services.
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). The Department
will provide additional guidance if necessary.
Best Execution
Section II(a)(2)(B) of the exemption would require that, as
required by the federal securities laws, the Financial
[[Page 40844]]
Institution and Investment Professional seek to obtain the best
execution of the investment transaction reasonably available under the
circumstances. Financial Institutions and Investment Professionals
subject to federal securities laws such as the Securities Act of 1933,
the Securities Exchange Act of 1934, and the Investment Advisers Act of
1940, and rules adopted by FINRA and the Municipal Securities
Rulemaking Board (MSRB), are obligated to a longstanding duty of best
execution. As described recently by the SEC, ``[a] broker-dealer's duty
of best execution requires a broker-dealer to seek to execute
customers' trades at the most favorable terms reasonably available
under the circumstances.'' \56\ This condition complements the
reasonable compensation standard set forth in ERISA and the Code.
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\56\ Regulation Best Interest Release, 84 FR at 33373, note 565.
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The Department would apply the best execution requirement
consistent with the federal securities laws. Financial Institutions
that are FINRA members would satisfy this subsection if they comply
with the standards in FINRA rules 2121 (Fair Prices and Commissions)
and 5310 (Best Execution and Interpositioning), or any successor rules
in effect at the time of the transaction, as interpreted by FINRA.
Financial Institutions engaging in a purchase or sale of a municipal
bond would satisfy this subsection if they comply with the standards in
MSRB rules G-30 (Prices and Commissions) and G-18 (Best Execution), or
any successor rules in effect at the time of the transaction, as
interpreted by MSRB. Financial Institutions that are subject to and
comply with the fiduciary duty under section 206 of the Investment
Advisers Act, which as described by the SEC encompasses a duty to seek
best execution, would satisfy this subsection.\57\
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\57\ SEC Fiduciary Interpretation, 84 FR at 33674-75 (Section
II.B.2 ``Duty to Seek Best Execution'').
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Misleading Statements
Section II(a)(3) would require that statements by the Financial
Institution and its Investment Professionals to the Retirement Investor
about the recommended transaction and other relevant matters are not
materially misleading at the time they are made. Other relevant matters
would include fees and compensation, material conflicts of interest,
and any other fact that could reasonably be expected to affect the
Retirement Investor's investment decisions. For example, the Department
would consider it materially misleading for the Financial Institution
or Investment Professional to include any exculpatory clauses or
indemnification provisions in an arrangement with a Retirement Investor
that are prohibited by applicable law.\58\ Retirement Investors are
clearly best served by statements and representations free from
material misstatements and omissions. Financial Institutions and
Investment Professionals best avoid liability--and best promote the
interests of Retirement Investors--by ensuring that accurate
communications are a consistent standard in all their interactions with
their customers.
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\58\ See, e.g., ERISA section 410 and see also ERISA
Interpretive Bulletin 75-4--Indemnification of fiduciaries under
ERISA Sec. 410(a). (``The Department of Labor interprets section
410(a) as rendering void any arrangement for indemnification of a
fiduciary of an employee benefit plan by the plan. Such an
arrangement would have the same result as an exculpatory clause, in
that it would, in effect, relieve the fiduciary of responsibility
and liability to the plan by abrogating the plan's right to recovery
from the fiduciary for breaches of fiduciary obligations.'')
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Disclosure--Section II(b)
Section II(b) of the exemption would require the Financial
Institution to provide certain written disclosures to the Retirement
Investor, prior to engaging in any transactions pursuant to the
exemption. The Financial Institution must acknowledge, in writing, that
the Financial Institution and its Investment Professionals are
fiduciaries under ERISA and the Code, as applicable, with respect to
any fiduciary investment advice provided by the Financial Institution
or Investment Professional to the Retirement Investor. The Financial
Institution must provide a written description of the services to be
provided and material conflicts of interest arising out of the services
and any recommended investment transaction. The description must be
accurate in all material respects.
The disclosure obligations in this proposal are designed to protect
Retirement Investors by enhancing the quality of information they
receive in connection with fiduciary investment advice. The disclosures
should be in plain English, taking into consideration Retirement
Investors' level of financial experience. The requirement can be
satisfied through any disclosure, or combination of disclosures,
required to be provided by other regulators so long as the disclosure
required by Section II(b) is included.
The proposed disclosures are designed to ensure that the fiduciary
nature of the relationship is clear to the Financial Institution and
Investment Professional, as well as the Retirement Investor, at the
time of the investment transaction. The Department does not intend the
fiduciary acknowledgment or any of the disclosure obligations to create
a private right of action as between a Financial Institution or
Investment Professional and a Retirement Investor and it does not
believe the exemption would do so.\59\ As noted above, ERISA section
502(a) provides a cause of action for fiduciary breaches and prohibited
transactions with respect to ERISA-covered Plans (but not IRAs). Code
section 4975 imposes a tax on disqualified persons participating in a
prohibited transaction involving Plans and IRAs (other than a fiduciary
acting only as such). These are the sole remedies for engaging in non-
exempt prohibited transactions.
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\59\ In Chamber of Commerce of the United States v. U.S.
Department of Labor, supra note 5, the U.S. Court of Appeals for the
5th Circuit found that the Department did not have authority to
include certain contract requirements in the new exemptions granted
as part of the 2016 fiduciary rulemaking. The Department is mindful
of this holding and has not included any contract requirement in
this proposal.
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The description of the services to be provided and material
conflicts of interest is necessary to ensure Retirement Investors
receive information to assess the conflicts and compensation
structures. The approach taken in the proposal is principles-based and
meant to provide the flexibility necessary to apply to a wide variety
of business models and practices. The proposal does not require
specific disclosures to be tailored for each Retirement Investor or
each transaction as long as a compliant disclosure is provided before
engaging in the particular transaction for which the exemption is
sought. The Department requests comments on the disclosure
requirements. In particular, the Department seeks comment on whether
the written acknowledgment of fiduciary status should be accompanied by
a disclosure of the fiduciary's obligations under the exemption to
provide advice in accordance with the Impartial Conduct Standard. The
Department also requests comment on whether the Department should
instead require this disclosure of Financial Institutions' and
Investment Professionals' obligations under the Impartial Conduct
Standards as an alternative to requiring written disclosure of their
fiduciary status.
Policies and Procedures--Section II(c)
General
Section II(c)(1) of the proposal would establish an overarching
requirement
[[Page 40845]]
that Financial Institutions establish, maintain and enforce written
policies and procedures prudently designed to ensure that the Financial
Institution and its Investment Professionals comply with the Impartial
Conduct Standards. Under Section II(c)(2), Financial Institutions'
policies and procedures would be required to mitigate conflicts of
interest to the extent that the policies and procedures, and the
Financial Institution's incentive practices, when viewed as a whole,
are prudently designed to avoid misalignment of the interests of the
Financial Institution and Investment Professionals and the interests of
Retirement Investors. In accordance with this standard, a reasonable
person reviewing the Financial Institution's incentive practices,
policies, and procedures would conclude that the policies do not give
Investment Professionals an incentive to violate the Impartial Conduct
Standards, but rather are reasonably designed to promote compliance
with the standards.
As defined in the proposal, a conflict of interest is ``an interest
that might incline a Financial Institution or Investment Professional--
consciously or unconsciously--to make a recommendation that is not in
the Best Interest of the Retirement Investor'' \60\ Conflict mitigation
is a critical condition of the exemption, and is an important factor
for the Department to make the findings under ERISA section 408(a) and
Code section 4975(d)(2), that the exemption is in the interests of, and
protective of, Retirement Investors. The requirement to avoid
misalignment means, for example, that Financial Institutions' policies
and procedures would be required to be prudently designed to protect
Retirement Investors from recommendations to make excessive trades, or
to buy investment products, annuities, or riders that are not in the
investor's best interest or that allocate excessive amounts to illiquid
or risky investments.
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\60\ This definition is consistent with the concept of a
conflict of interest in the SEC's rulemaking. Regulation Best
Interest definition of Conflict of Interest, 17 CFR 240.15l-1(b)(3);
SEC Fiduciary Interpretation, 84 FR at 33671.
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Section II(c)(3) of the exemption would establish specific
documentation requirements for recommendations to roll over Plan or IRA
assets to another Plan or IRA and to change from one type of account to
another (e.g., from a commission-based account to a fee-based account).
Financial Institutions making these recommendations would be required
to document the specific reason or reasons why the recommendation was
considered to be in the best interest of the Retirement Investor. The
Department requests comments on whether additional specific
documentation requirements would be appropriate.
To comply with the conditions in Section II(c), Financial
Institutions would identify and carefully focus on the particular
aspects of their business model that may create incentives that are
misaligned with the interests of Retirement Investors. If, for example,
a Financial Institution anticipates that conflicts of interest in its
business model will center on advice to roll over Plan assets, and
after the rollover, the Financial Institution and Investment
Professional will be compensated on a level-fee basis, the Financial
Institution's policies and procedures should focus on the rollover or
distribution recommendation. The proposed requirement in Section
II(c)(3) to document the reason for rollover and account
recommendations supports compliance with the Impartial Conduct
Standards in this context.\61\
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\61\ In general, after the rollover, the ongoing receipt of
compensation based on a fixed percentage of the value of assets
under management does not require a prohibited transaction
exemption. However, the Department cautions that certain practices
such as ``reverse churning'' (i.e. recommending a fee-based account
to an investor with low trading activity and no need for ongoing
monitoring or advice) or recommending holding an asset solely to
generate more fees may be prohibited transactions that would not
satisfy the Impartial Conduct Standards.
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On the other hand, if a Financial Institution intends to receive
transaction-based third party compensation, and compensate Investment
Professionals based on transactions that occur in a Retirement
Investor's accounts, such as through commissions, the Financial
Institution's policies and procedures would also address the incentives
created by these compensation arrangements. Financial Institutions that
provide advice regarding proprietary products or from limited menus of
products would consider the conflicts of interest these arrangements
create. Approaches to these conflicts of interest are discussed in more
detail below.
Advice To Roll Over Plan or IRA Assets
Rollover recommendations are a primary concern of the Department,
as Financial Institutions and Investment Professionals may have a
strong economic incentive to recommend that investors roll over assets
into one of their Institution's IRAs, whether from a Plan or from an
IRA account at another Financial Institution, or even between different
account types. The decision to roll over assets from an ERISA-covered
Plan to an IRA may be one of the most important financial decisions
that Retirement Investors make, as it may have a long-term impact on
their retirement security.
The Department believes the requirement in Section II(c)(3) to
document the reasons that advice to take a distribution or to roll over
Plan or IRA assets were in the Retirement Investor's best interest will
serve an important role in protecting Retirement Investors during this
significant decision. The requirement is designed to ensure that
Investment Professionals take the time to form a prudent
recommendation, and that a record is available for later review.
For purposes of compliance with the exemption, a prudent
recommendation to roll over from an ERISA-covered Plan to an IRA would
necessarily include consideration and documentation of the following:
The Retirement Investor's alternatives to a rollover, including leaving
the money in his or her current employer's Plan, if permitted, and
selecting different investment options; the fees and expenses
associated with both the Plan and the IRA; whether the employer pays
for some or all of the Plan's administrative expenses; and the
different levels of services and investments available under the Plan
and the IRA. For rollovers from another IRA or changes from a
commission-based account to a fee-based arrangement, a prudent
recommendation would include consideration and documentation of the
services that would be provided under the new arrangement.
In evaluating a potential rollover from an ERISA-covered Plan, the
Investment Professional and Financial Institution should make diligent
and prudent efforts to obtain information about the existing Plan and
the participant's interests in it. If the Retirement Investor is
unwilling to provide the information, even after a full explanation of
its significance, and the information is not otherwise readily
available, the Investment Professional should make a reasonable
estimation of expenses, asset values, risk, and returns based on
publicly available information and explain the assumptions used and
their limitations to the Retirement Investor. The Department requests
comment on whether there are any other actions the Department should or
could take with respect to disclosure or reporting that would promote
prudent rollover advice without overlapping existing regulatory
requirements.
[[Page 40846]]
Commission-Based Compensation Arrangements
Financial Institutions that compensate Investment Professionals
through transaction-based payments and incentives would need to
consider how to minimize the impact of these compensation incentives on
fiduciary investment advice to Retirement Investors, so that the
Financial Institution would be able to meet the exemption's standard of
conflict mitigation set forth in proposed Section II(c)(2). As noted
above, this standard would require the policies and procedures, and the
Financial Institution's incentive practices, when viewed as a whole, to
be prudently designed to avoid misalignment of the interests of the
Financial Institution and Investment Professionals and the interests of
Retirement Investors.
For commission-based compensation arrangements, Financial
Institutions would be encouraged to focus on both financial incentives
to Investment Professionals and supervisory oversight of investment
advice. These two aspects of the Financial Institution's policies and
procedures would complement each other, and Financial Institutions
would retain the flexibility, based on the characteristics of their
businesses, to adjust the stringency of each component provided that
the exemption's overall standards would be satisfied. Financial
Institutions that significantly mitigate commission-based compensation
incentives would have less need to rigorously oversee Investment
Professionals. Conversely, Financial Institutions that have significant
variation in compensation across different investment products would
need to implement more stringent supervisory oversight.
In developing compliance structures, the Department envisions that
Financial Institutions would implement conflict mitigation strategies
identified by the Financial Institutions' other regulators. The
following non-exhaustive examples of practices identified as options by
the SEC could be implemented by Financial Institutions in compensating
Investment Professionals: (i) Avoiding compensation thresholds that
disproportionately increase compensation through incremental increases
in sales; (ii) Minimizing compensation incentives for employees to
favor one type of account over another; or to favor one type of product
over another, proprietary or preferred provider products, or comparable
products sold on a principal basis, for example, by establishing
differential compensation based on neutral factors; (iii) Eliminating
compensation incentives within comparable product lines by, for
example, capping the credit that an associated person may receive
across mutual funds or other comparable products across providers; (iv)
Implementing supervisory procedures to monitor recommendations that
are: near compensation thresholds; near thresholds for firm
recognition; involve higher compensating products, proprietary products
or transactions in a principal capacity; or, involve the rollover or
transfer of assets from one type of account to another (such as
recommendations to roll over or transfer assets in an ERISA account to
an IRA) or from one product class to another; (v) Adjusting
compensation for associated persons who fail to adequately manage
conflicts of interest; and (vi) Limiting the types of retail customer
to whom a product, transaction or strategy may be recommended.\62\
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\62\ Regulation Best Interest Release, 84 FR at 33392.
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Financial Institutions also should consider minimizing incentives
at the Financial Institution level. Firms could establish or enhance
the review process for investment products that may be recommended to
Retirement Investors. This process could include procedures for
identifying and mitigating conflicts of interest associated with the
product and declining to recommend a product if the Financial
Institution cannot effectively mitigate associated conflicts of
interest.
Insurance companies and insurance agents that are investment advice
fiduciaries relying on the exemption would be encouraged to adopt
strategies similar to those identified above to address conflicts of
interest. Insurance companies could also supervise independent
insurance agents who provide investment advice on their products
through the mechanisms noted above. To comply with the exemption, the
insurer could adopt and implement supervisory and review mechanisms and
avoid improper incentives that preferentially push the products,
riders, and annuity features that might incentivize Investment
Professionals to provide investment advice to Retirement Investors that
does not meet the Impartial Conduct Standards. Insurance companies
could implement procedures to review annuity sales to Retirement
Investors to ensure that they were made in satisfaction of the
Impartial Conduct Standards, much as they may already be required to
review annuity sales to ensure compliance with state-law suitability
requirements.\63\
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\63\ Cf. NAIC Suitability in Annuity Transactions Model
Regulation, Spring 2020, Section 6.C.(2)(d) (``The insurer shall
establish and maintain procedures for the review of each
recommendation prior to issuance of an annuity that are designed to
ensure that there is a reasonable basis to determine that the
recommended annuity would effectively address the particular
consumer's financial situation, insurance needs and financial
objectives. Such review procedures may apply a screening system for
the purpose of identifying selected transactions for additional
review and may be accomplished electronically or through other means
including, but not limited to, physical review. Such an electronic
or other system may be designed to require additional review only of
those transactions identified for additional review by the selection
criteria''); and (e) (``The insurer shall establish and maintain
reasonable procedures to detect recommendations that are not in
compliance with subsections A, B, D and E. This may include, but is
not limited to, confirmation of the consumer's consumer profile
information, systematic customer surveys, producer and consumer
interviews, confirmation letters, producer statements or
attestations and programs of internal monitoring. Nothing in this
subparagraph prevents an insurer from complying with this
subparagraph by applying sampling procedures, or by confirming the
consumer profile information or other required information under
this section after issuance or delivery of the annuity''), available
at https://www.naic.org/store/free/MDL-275.pdf. The prior version of
the model regulation, which was adopted in some form by a number of
states, also included similar provisions requiring systems to
supervise recommendations. See Annuity Suitability (A) Working Group
Exposure Draft, Adopted by the Committee Dec. 30, 2019, available at
https://www.naic.org/documents/committees_mo275.pdf. (comparing 2020
version with prior version).
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In this regard, insurance company Financial Institutions would be
responsible only for an Investment Professional's recommendation and
sale of products offered to Retirement Investors by the insurance
company in conjunction with fiduciary investment advice, and not
unrelated and unaffiliated insurers.\64\ Insurance companies could
implement the policies and procedures by monitoring market prices and
benchmarks for their products and services, and remaining attentive to
any financial inducements they offer to independent agents that could
result in a misalignment of the interests of the agent and his or her
Retirement Investor customer. Insurers could also create a system of
oversight and compliance by contracting with an IMO to implement
policies and procedures designed to ensure that all of the agents
associated with the intermediary adhere to the conditions of this
exemption. Thus, for example, as one possible approach, the
intermediary could eliminate compensation incentives across all the
insurance
[[Page 40847]]
companies that work with the intermediary, assisting each of the
insurance companies with their independent obligations under the
exemption. This might involve the intermediary's review of
documentation prepared by insurance agents to comply with the
exemption, as may be required by the insurance company, or the use of
third-party industry comparisons available in the marketplace to help
independent insurance agents recommend products that are prudent for
the Retirement Investors they advise.\65\
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\64\ Cf. Id., Section 6.C.(4) (``An insurer is not required to
include in its system of supervision: (a) A producer's
recommendations to consumers of products other than the annuities
offered by the insurer''), available at https://www.naic.org/store/free/MDL-275.pdf.
\65\ None of the conditions of this proposal are intended to
categorically bar the provision of employee benefits to insurance
company statutory employees, despite the practice of basing
eligibility for such benefits on sales of proprietary products of
the insurance company. See Internal Revenue Code section 3121.
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The Department notes that regulators in the securities and
insurance industry have adopted provisions requiring elimination of
sales contests and similar incentives such as sales quotas, bonuses,
and non-cash compensation that are based on sales of certain
investments within a limited period of time.\66\ The Department agrees
that these practices create incentives to recommend products that are
not in a Retirement Investor's best interest that cannot be effectively
mitigated. Therefore, Financial Institutions' policies and procedures
would not be prudently designed to avoid a misalignment of interests
between Investment Professionals and Retirement Investors if they
establish or permit these practices. To satisfy the exemption's
standard of mitigation, Financial Institutions would be required to
carefully consider performance and personnel actions and practices that
could encourage violation of the Impartial Conduct Standards.
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\66\ Regulation Best Interest Release, 84 FR at 33394-97; NAIC
Suitability in Annuity Transactions Model Regulation, Spring 2020,
Section 6.C.(2)(h), available at https://www.naic.org/store/free/MDL-275.pdf.
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The Department notes Financial Institutions complying with the
exemption would need to review their policies and procedures
periodically and reasonably revise them as necessary to ensure that the
policies and procedures continue to satisfy the conditions of this
exemption. In particular, the exemption would require ongoing vigilance
as to the impact of conflicts of interest on the provision of fiduciary
investment advice to Retirement Investors. As a matter of prudence,
Financial Institutions should address any deficiencies in their
policies and procedures if, in fact, the policies and procedures are
not achieving their intended goal of ensuring compliance with the
exemption and the provision of advice that satisfies the Impartial
Conduct Standards. The Department seeks comment on the proposed policy
and procedure requirements, including whether this principle-based
method is sufficiently protective of participants and beneficiaries.
Proprietary Products and Limited Menus of Investment Products
It is important to note that the Department believes that the best
interest standard can be satisfied by Financial Institutions and
Investment Professionals that provide investment advice on proprietary
products or on a limited menu, including limitations to proprietary
products \67\ and products that generate third party payments.\68\
Product limitations can serve a beneficial purpose by allowing broker-
dealers and associated persons to develop increased familiarity with
the products they recommend. At the same time, limited menus,
particularly if they focus on proprietary products and products that
generate third party payments, can result in heightened conflicts of
interest. Financial Institutions and their affiliates may receive more
compensation than they would for recommending other products, and, as a
result, Investment Professionals' and Financial Institutions' interests
may be misaligned with the interests of Retirement Investors.
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\67\ Proprietary products include products that are managed,
issued or sponsored by the Financial Institution or any of its
affiliates.
\68\ Third party payments include sales charges when not paid
directly by the Plan or IRA; gross dealer concessions; revenue
sharing payments; 12b-1 fees; distribution, solicitation or referral
fees; volume-based fees; fees for seminars and educational programs;
and any other compensation, consideration or financial benefit
provided to the Financial Institution or an affiliate or related
entity by a third party as a result of a transaction involving a
Plan or IRA.
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Financial Institutions and Investment Professionals providing
investment advice on proprietary products or on a limited menu would
satisfy the standard provided they give complete and accurate
disclosure of their material conflicts of interest in connection with
such products or limitations and adopt policies and procedures that are
prudently designed to prevent any conflicts of interest from causing a
misalignment of the interests of the Financial Institution and
Investment Professional with the interests of the Retirement Investor.
This would include policies applicable to circumstances where the
Financial Institution or Investment Professional prudently determines
that its proprietary products or limited menu do not offer Retirement
Investors an investment option in their best interest when compared
with other investment alternatives available in the marketplace. The
Department envisions that Financial Institutions complying with the
Impartial Conduct Standards would carefully consider their product
offerings and form a reasonable conclusion about whether the menu of
investment options would permit Investment Professionals to provide
fiduciary investment advice to Retirement Investors in accordance with
the Impartial Conduct Standards. The exemption would be available if
the Financial Institution prudently concludes that its offering of
proprietary products, or its limitations on investment product
offerings, in conjunction with the policies and procedures, would not
cause a misalignment of interests. Financial Institutions and
Investment Professionals cannot use a limited menu to justify making a
recommendation that does not meet the Impartial Conduct Standards.
The Department seeks comment on this analysis. Is this preamble
guidance sufficient or do commenters believe that it is important for
the exemption text to specifically address proprietary products and
limited menus of investment products? Should the Department more
specifically incorporate provisions of Regulation Best Interest in this
respect? \69\ Should this exemption specify documentation requirements
reflecting the Financial Institution's analysis or conclusions with
respect to its adoption of a limited menu or its recommendation of
proprietary products, and its ability to comply with the conditions of
this exemption with respect to such products or menus?
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\69\ See 17 CFR 240.15l-1(a)(2)(iii)(C) describing policies and
procedures addressing material limitations placed on securities or
investment strategies.
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Retrospective Review--Section II(d)
Section II(d) of the proposal relates to the Financial
Institution's oversight of its compliance, and its Investment
Professionals' compliance, with the Impartial Conduct Standards and the
policies and procedures. While mitigation of Financial Institutions'
and Investment Professionals' conflicts of interest is critical,
Financial Institutions must also monitor Investment Professionals'
conduct to detect advice that does not adhere to the Impartial
[[Page 40848]]
Conduct Standards or the Financial Institution's policies and
procedures.
Under the proposal, Financial Institutions would be required to
conduct a retrospective review, at least annually, that is reasonably
designed to assist the Financial Institution in detecting and
preventing violations of, and achieving compliance with, the Impartial
Conduct Standards and the policies and procedures governing compliance
with the exemption. The Department envisions that the review would
involve testing a sample of transactions to determine compliance.
The methodology and results of the retrospective review would be
reduced to a written report that is provided to the Financial
Institution's chief executive officer (or equivalent officer). That
officer would be required to certify annually that:
(A) The officer has reviewed the report of the retrospective
review;
(B) The Financial Institution has in place policies and procedures
prudently designed to achieve compliance with the conditions of this
exemption; and
(C) The Financial Institution has in place a prudent process to
modify such policies and procedures as business, regulatory and
legislative changes and events dictate, and to test the effectiveness
of such policies and procedures on a periodic basis, the timing and
extent of which is reasonably designed to ensure continuing compliance
with the conditions of this exemption.
This retrospective review, report and certification would be
required to be completed no later than six months following the end of
the period covered by the review. The Financial Institution would be
required to retain the report and supporting data for a period of six
years. If the Department, any other federal or state regulator of the
Financial Institution, or any applicable self-regulatory organization,
requests the written report and supporting data within those six years,
the Financial Institution would make the requested documents available
within 10 business days of the request. The Department believes that
the requirement to provide the written report within 10 business days
will ensure that Financial Institutions diligently prepare their
reports each year, resulting in meaningful protection of Retirement
Investors. The Department requests comments about this process,
including regarding the timing and certified information.
Financial Institutions can use the results of the review to find
more effective ways to ensure that Investment Professionals are
providing investment advice in accordance with the Impartial Conduct
Standards, and to correct any deficiencies in existing policies and
procedures. Requiring the chief executive officer (or equivalent, i.e.,
the most senior officer or executive in charge of managing the
Financial Institution) to certify review of the report is a means of
creating accountability for the review. This would serve the purpose of
ensuring that more than one person determines whether the Financial
Institution is complying with the conditions of the exemption and
avoiding non-exempt prohibited transactions. If the chief executive
officer does not have the experience or expertise to determine whether
to make the certification, he or she would be expected to consult with
a knowledgeable compliance professional to be able to do so. The
proposed retrospective review is based on FINRA rules governing how
broker-dealers supervise associated persons,\70\ adapted to focus on
the conditions of the exemption. The Department is aware that other
Financial Institutions are subject to regulatory requirements to review
their policies and procedures; \71\ however, for the reasons stated
above, the Department believes that the specific certification
requirement in the proposal will serve to protect Retirement Investors
in the context of conflicted investment advice transactions.
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\70\ See FINRA rules 3110, 3120, and 3130.
\71\ See e.g., Rule 206(4)-7 under the Investment Advisers Act
of 1940.
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Eligibility (Section III)
Section III of the proposal identifies circumstances under which an
Investment Professional or Financial Institution would not be eligible
to rely on the exemption. The grounds for ineligibility would involve
certain criminal convictions or certain egregious conduct with respect
to compliance with the exemption. The proposed period of ineligibility
would be 10 years.
Criminal Convictions
An Investment Professional or Financial Institution would become
ineligible upon the conviction of any crime described in ERISA section
411 arising out of provision of advice to Retirement Investors, except
as described below. The Department includes crimes described in ERISA
section 411 for the proposal because they are likely to directly
contravene the Investment Professional's or Financial Institution's
ability to maintain the high standard of integrity, care, and undivided
loyalty demanded by a fiduciary's position of trust and confidence.
Ineligibility after a criminal conviction described in the
exemption would be automatic for an Investment Professional. However,
Financial Institutions with a criminal conviction described in the
exemption would be permitted to submit a petition to the Department and
seek a determination that continued reliance on the exemption would not
be contrary to the purposes of the exemption. Petitions would be
required to be submitted within 10 business days of the conviction to
the Director of the Office of Exemption Determinations by email at [email protected], or by certified mail at Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, 200 Constitution Avenue NW, Suite 400, Washington,
DC 20210.
Following receipt of the petition, the Department would provide the
Financial Institution with the opportunity to be heard, in person or in
writing or both. Because of the 10-business day timeframe for
submitting a petition, the Department would not expect the Financial
Institution to set forth its entire position or argument in its initial
petition. The opportunity to be heard in person would be limited to one
in-person conference unless the Department determines in its sole
discretion to allow additional conferences.
The Department's determination as to whether to grant the petition
would be based solely on its discretion. In determining whether to
grant the petition, the Department will consider the gravity of the
offense; the relationship between the conduct underlying the conviction
and the Financial Institution's system and practices in its retirement
investment business as a whole; the degree to which the underlying
conduct concerned individual misconduct, or, alternately, corporate
managers or policy; how recent was the underlying lawsuit; remedial
measures taken by the Financial Institution upon learning of the
underlying conduct; and such other factors as the Department determines
in its discretion are reasonable in light of the nature and purposes of
the exemption. The Department would consider whether any extenuating
circumstances would indicate that the Financial Institution should be
able to continue to rely on the exemption despite the conviction. The
standard for the determination, as stated above, would be that
continued reliance on the exemption would not be contrary to the
[[Page 40849]]
purposes of the exemption. Accordingly, the Department will focus on
the Financial Institution's ability to fulfil its obligations under the
exemption prudently and loyally, for the protection of Retirement
Investors. The Department will provide a written determination to the
Financial Institution that articulates the basis for the determination.
The Department notes that the denial of a Financial Institution's
petition will not necessarily indicate that the Department will not
entertain a separate individual exemption request submitted by the same
Financial Institution subject to additional protective conditions.
Conduct With Respect to Compliance With the Exemption
An Investment Professional or Financial Institution would become
ineligible upon the date of a written ineligibility notice from the
Director of the Office of Exemption Determinations that they (i)
engaged in a systematic pattern or practice of violating the conditions
of the exemption; (ii) intentionally violated the conditions of this
exemption; or (iii) provided materially misleading information to the
Department in connection with the Investment Professional's or
Financial Institution's conduct under the exemption. This type of
conduct in connection with exemption compliance would indicate that the
entity should not be permitted to continue to rely on the broad
prohibited transaction relief in the class exemption.
The proposal sets forth a process governing the issuance of the
written ineligibility notice, as follows. Prior to issuing a written
ineligibility notice, the Director of the Office of Exemption
Determinations would be required to issue a written warning to the
Investment Professional or Financial Institution, as applicable,
identifying specific conduct that could lead to ineligibility, and
providing a six-month opportunity to cure. At the end of the six-month
period, if the Department determined that the conduct persisted, it
would provide the Investment Professional or Financial Institution with
the opportunity to be heard, in person or in writing, before the
Director of the Office of Exemption Determinations issued the written
ineligibility notice. The written ineligibility notice would articulate
the basis for the determination that the Investment Professional or
Financial Institution engaged in conduct warranting ineligibility.
Period and Scope of Ineligibility
The proposed period of ineligibility would be 10 years; however,
the ineligibility provisions would apply differently to Investment
Professionals and Financial Institutions. An Investment Professional
convicted of a crime would become ineligible immediately upon the date
the Investment Professional is convicted by a trial court, regardless
of whether that judgment remains under appeal, or upon the date of the
written ineligibility notice from the Office of Exemption
Determinations.
A Financial Institution's ineligibility would be triggered by its
own conviction or receipt of a written ineligibility notice, or that of
another Financial Institution in the same Control Group. A Financial
Institution is in a Control Group with another Financial Institution
if, directly or indirectly, the Financial Institution owns at least 80
percent of, is at least 80 percent owned by, or shares an 80 percent or
more owner with, the other Financial Institution. For purposes of this
provision, if the Financial Institutions are not corporations,
ownership is defined to include interests in the Financial Institution
such as profits interest or capital interests.
The Department is including Control Group Financial Institutions to
ensure that a Financial Institution facing ineligibility for its
actions affecting Retirement Investors cannot simply transfer its
fiduciary investment advice business to another Financial Institution
that is closely related and also provides fiduciary investment advice
to Retirement Investors, thus avoiding the ineligibility provisions
entirely. The proposed definition is narrowly tailored to cover only
other investment advice fiduciaries that share significant ownership. A
Financial Institution could not become ineligible based on the actions
of an entity engaged in unrelated services that happened to share a
small amount of common ownership. The 80 percent threshold is
consistent with the Code's rules for determining when employees of
multiple corporations should be treated as employed by the same
employer.\72\ The Department requests comments on this definition. Is
80 percent an appropriate threshold? Are there alternative ways of
defining ownership that would be easily applicable to all types of
Financial Institutions?
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\72\ See Code section 414(b).
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Unlike Investment Professionals, Financial Institutions would have
a one-year winding down period before becoming ineligible to rely on
the exemption, as long as they complied with the exemption's other
conditions during that year. The winding down period begins on the date
of the trial court's judgment, regardless of whether that judgment
remains under appeal. Financial Institutions that timely submit a
petition regarding the conviction would become ineligible as of the
date of a written notice of denial from the Office of Exemption
Determinations. Financial Institutions that become ineligible due to
conduct with respect to exemption compliance would become ineligible as
of the date of the written ineligibility notice from the Office of
Exemption Determinations.
Financial Institutions or Investment Professionals that become
ineligible to rely on this exemption may rely on a statutory prohibited
transaction exemption if one is available or may seek an individual
prohibited transaction exemption from the Department. The Department
encourages any Financial Institution or Investment Professional facing
allegations that could result in ineligibility to begin the application
process. If the applicant becomes ineligible and the Department has not
granted a final individual exemption, the Department will consider
granting retroactive relief, consistent with its policy as set forth in
29 CFR 2570.35(d). Retroactive exemptions may require additional
prospective compliance.
The Department seeks comment on the proposal's eligibility
provisions. Are the crimes included in the proposal properly tailored
to identify Investment Professionals and Financial Institutions that
should no longer be eligible to rely on the broad relief in the class
exemption? Is additional guidance needed with respect to any aspect of
the ineligibility section to provide clarity to Investment
Professionals and Financial Institutions?
Recordkeeping (Section IV)
Section IV would condition relief on the Financial Institution
maintaining the records demonstrating compliance with this exemption
for six years. The Department generally imposes a recordkeeping
requirement on exemptions so that parties relying on an exemption can
demonstrate, and the Department can verify, compliance with the
conditions of the exemption.
To demonstrate compliance with the exemption, Financial
Institutions would be required to provide, among other things,
documentation of rollover recommendations and their written policies
and procedures adopted
[[Page 40850]]
pursuant to Section II(c). The Department does not expect Financial
Institutions to document the reason for every investment recommendation
made pursuant to the exemption. However, documentation may be
especially important for recommendations of particularly complex
products or recommendations that might, on their face, appear
inconsistent with the best interest of a Retirement Investor.
Section IV would require that the records be made available, to the
extent permitted by law, to any authorized employee of the Department;
any fiduciary of a Plan that engaged in an investment transaction
pursuant to this exemption; any contributing employer and any employee
organization whose members are covered by a Plan that engaged in an
investment transaction pursuant to this exemption; or any participant
or beneficiary of a Plan, or IRA owner that engaged in an investment
transaction pursuant to this exemption.
The records should be made reasonably available for examination at
their customary location during normal business hours. Participants,
beneficiaries and IRA owners; Plan fiduciaries; and contributing
employers/employee organizations should be able to request only
information applicable to their own transactions, and not privileged
trade secrets or privileged commercial or financial information of the
Financial Institution, or information identifying other individuals.
Should the Financial Institution refuse to disclose information on the
basis that the information is exempt from disclosure, the Department
expects that the Financial Institution would provide a written notice,
within 30 days, advising the requestor of the reasons for the refusal
and that the Department may request such information.
Regulatory Impact Analysis
Executive Orders 12866 and 13563 Statement
Executive Orders 12866 \73\ and 13563 \74\ 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 costs
and benefits, reducing costs, harmonizing rules, and promoting
flexibility.
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\73\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\74\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 21, 2011).
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Under Executive Order 12866, ``significant'' regulatory actions are
subject to review by the Office of Management and Budget (OMB). Section
3(f) of the Executive Order defines a ``significant regulatory action''
as any regulatory action that is likely to result in a rule that may:
(1) Have an annual effect on the economy of $100 million or more or
adversely and materially affect 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'');
(2) Create a serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
(3) Materially alter the budgetary impacts of entitlement grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
(4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
the Executive Order.
The Department anticipates that this proposed exemption would be
economically significant within the meaning of section 3(f)(1) of
Executive Order 12866. Therefore, the Department provides the following
assessment of the potential benefits and costs associated with this
proposed exemption. In accordance with Executive Order 12866, this
proposed exemption was reviewed by OMB.
If the exemption is granted, it will be transmitted to Congress and
the Comptroller General for review in accordance with the Congressional
Review Act provisions of the Small Business Regulatory Enforcement
Fairness Act of 1996 (5 U.S.C. 801 et seq.).
Need for Regulatory Action
Following the United States Court of Appeals for the Fifth Circuit
decision to vacate the Department's 2016 fiduciary rule and exemptions,
the Department issued the temporary enforcement policy under FAB 2018-
02 and announced its intent to provide additional guidance in the
future. Since then, as discussed earlier in this preamble, the
regulatory landscape has changed as other regulators, including the
SEC, have adopted enhanced conduct standards for financial services
professionals. These changes are accordingly reflected in the baseline
that the Department applies when it evaluates the benefits and costs
associated with this proposed exemption below.
At the same time, the share of total Plan participation
attributable to participant-directed defined contribution (DC) Plans
continued to grow. In 2017, 83 percent of DC Plan participation was
attributable to 401(k) Plans, and 98 percent of 401(k) Plan
participants were responsible directing some or all of their account
investments.\75\ Individual DC Plan participants and IRA investors are
responsible for investing their retirement savings and they are in need
of high quality, impartial advice from financial service professionals
in making these investment decisions.
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\75\ Private Pension Plan Bulletin Historic Tables and Graphs
1975-2017, Employee Benefits Security Administration (Sep. 2018),
https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf.
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Given this backdrop, the Department believes that it is appropriate
to propose an exemption to formalize the relief provided in the FAB.
The exemption would provide Financial Institutions and Investment
Professionals broader, more flexible prohibited transaction relief than
is currently available, while safeguarding the interests of Retirement
Investors. Offering a permanent exemption based on the FAB would
provide certainty to Financial Institutions and Investment
Professionals that may currently be relying on the temporary
enforcement policy.
Benefits
This proposed exemption would generate several benefits. It would
provide Financial Institutions and Investment Professionals with
flexibility to choose between the new exemption or existing exemptions,
depending on their needs and business models. In this regard, the
proposed exemption would help preserve different business models,
transaction arrangements, and products that meet different needs in the
market place. This can, in turn, help preserve wide availability of
investment advice arrangements and products for Retirement Investors.
Furthermore, the exemption would provide certainty for Financial
Institutions and Investment Professionals that opted to comply with the
enforcement policy announced in the FAB to continue with that
compliance approach, and the exemption would ensure advice that
satisfies the Impartial Conduct Standards is widely available to
Retirement Investors without any interruption.
[[Page 40851]]
As described above, the FAB announced a temporary enforcement
policy that would apply until the issuance of further guidance. Its
designation as ``temporary'' communicated its nature as a transitional
measure following the vacatur of the Department's 2016 rulemaking.
Although the FAB remains in place following this proposal, the
Department does not envision that the FAB represents a permanent
compliance approach. This is due in part to the fact that the FAB
allows Financial Institutions to avoid enforcement action by the
Department but it does not (and cannot) provide relief from private
litigation.
In connection with the more permanent relief it would provide, the
exemption would have more specific conditions than the FAB, which
required only good faith compliance with the Impartial Conduct
Standards. The conditions in the proposal are designed to support the
provision of investment advice that meets the Impartial Conduct
Standards. For example, the required policies and procedures and
retrospective review inform Financial Institutions as to how they
should implement compliance with the standards.
Some Financial Institutions may consider whether to rely on the
Department's existing exemptions rather than adopt the specific
conditions in the new proposed exemption. The existing exemptions
generally rely on disclosures as conditions. However, the existing
exemptions are also very narrowly tailored in terms of the transactions
and types of compensation arrangements that are covered as well as the
parties that may rely on the exemption. For example, the existing
exemptions were never amended to clearly cover the third party
compensation arrangements, such as revenue sharing, that developed over
time. Investment advice fiduciaries relying on some of the existing
exemptions would be limited to the types of compensation that tend to
be more transparent to Retirement Investors, such as commission
payments.
For a number of reasons, Financial Institutions may decide to rely
on the new exemption, if it is finalized, instead of the Department's
existing exemptions. The proposed exemption does not identify specific
transactions or limit the types of payments that are covered, so
Financial Institutions may prefer this flexibility. Additionally,
Financial Institutions may determine that there is a marketing
advantage to acknowledging their fiduciary status with respect to
Retirement Investors, as would be required by the new exemption.
As the proposed exemption would apply to multiple types of
investment advice transactions, it would potentially allow Financial
Institutions to rely on one exemption for investment advice
transactions under a single set of conditions. This approach may allow
Financial Institutions to streamline compliance, as compared to relying
on multiple exemptions with multiple sets of conditions, resulting in a
lower overall compliance burden for some Financial Institutions.
Retirement Investors may benefit, in turn, if those Financial
Institutions pass their savings on to them.
This proposed exemption's alignment with other regulatory conduct
standards could result in a reduction in overall regulatory burden as
well. As discussed earlier in this preamble, the proposed exemption was
developed in consideration of other regulatory conduct standards. The
Department envisions that Financial Institutions and Investment
Professionals that have already developed, or are in the process of
developing, compliance structures for other regulators' standards will
be able to experience regulatory efficiencies through reliance on the
new exemption.
As discussed above, the Department believes that the proposed
exemption would provide significant protections for Retirement
Investors. The proposed exemption would not expand Retirement
Investors' ability, such as through required contracts and warranty
provisions, to enforce their rights in court or create any new legal
claims above and beyond those expressly authorized in ERISA. Rather,
the proposed exemption relies in large measure on Financial
Institutions' reasonable oversight of Investment Professionals and
their adoption of a culture of compliance. Accordingly, in addition to
the Impartial Conduct Standards, the exemption includes conditions
designed to support investment advice that meets those standards, such
as the provisions requiring written policies and procedures,
documentation of rollover recommendations, and retrospective review.
Finally, the proposal provides that Financial Institutions and
Investment Professionals with certain criminal convictions or that
engage in egregious conduct with respect to compliance with the
exemption would become ineligible to rely on the exemption. These
factors would indicate that the Financial Institution or Investment
Professional does not have the ability to maintain the high standard of
integrity, care, and undivided loyalty demanded by a fiduciary's
position of trust and confidence. This targeted approach of allowing
the Department to give special attention to parties with certain
criminal convictions or with a history of egregious conduct with
respect to compliance with the exemption should provide significant
protections for Retirement Investors while preserving wide availability
of investment advice arrangements and products.
Although the Department expects this proposed exemption to generate
significant benefits, it has not quantified the benefits due to a lack
of available data. However, the Department expects the benefits to
outweigh the compliance costs associated with this proposal because it
creates an additional pathway for compliance with ERISA's prohibited
transaction provisions. This new pathway is broader than existing
exemptions, and thus applies to a wider range of transaction
arrangements and products than the relief that is already available.
The Department anticipates that entities will generally take advantage
of the exemptive relief available in this proposal only if it is less
costly than other alternatives already available, including avoiding
prohibited transactions or complying with a different exemption. The
Department requests comments about the specific benefits that may flow
from the exemption and invites commenters to submit quantifiable data
that would support or disprove the Department's expectations.
Costs
To estimate compliance costs associated with the proposed
exemption, the Department takes into account the changed regulatory
baseline. For example, the Department assumes affected entities will
likely incur incremental costs if they are already subject to another
regulator's similar rules or requirements. Because this proposed
exemption is intended to align significantly with other regulators'
rules and standards of conduct, the Department expects the compliance
costs associated with this proposal to be modest. The Department
estimates that the proposed exemption would impose costs of more than
$44 million in the first year and $42 million in each subsequent
year.\76\ Over 10 years, the
[[Page 40852]]
costs associated with the proposal would be approximately $294 million,
annualized to $42 million per year (using a 7 percent discount
rate).\77\ Using a perpetual time horizon (to allow the comparisons
required under E.O. 13771), the annualized costs in 2016 dollars are
$30 million at a 7 percent discount rate. These costs are broken down
and explained below. More details are provided in the Paperwork
Reduction Act section as well. The Department requests comments on this
overall estimate and is especially interested in how different entities
will incur costs associated with this proposed exemption as well as any
quantifiable data that would support or contradict any aspect of its
analysis below.
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\76\ These estimates rely on the Employee Benefits Security
Administration's 2018 labor rate estimates. See Labor Cost Inputs
Used in the Employee Benefits Security Administration, Office of
Policy and Research's Regulatory Impact Analyses and Paperwork
Reduction Act Burden Calculation, Employee Benefits Security
Administration (June 2019), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
\77\ The costs would be $357 million over 10-year period,
annualized to $42 million per year, if a 3 percent discount rate is
applied.
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Affected Entities
As a first step, the Department examines the entities likely to be
affected by the proposed exemption. The proposal would potentially
impact SEC- and state-registered investment advisers (IAs), broker-
dealers (BDs), banks, and insurance companies, as well as their
employees, agents, and representatives. The Department acknowledges
that not all these entities will serve as investment advice fiduciaries
to Plans and IRAs within the meaning of ERISA and the Code.
Additionally, because other exemptions are also currently available to
these entities, it is unclear how widely Financial Institutions will
rely upon the exemption and which firms are most likely to choose to
rely on it. To err on the side of overestimation, the Department
includes all entities eligible for this proposed relief in its cost
estimation. The Department solicits comments about which, and how many,
entities would likely utilize this proposed exemption.
Broker-Dealers (BDs)
As of December 2018, there were 3,764 registered BDs. Of those,
2,766, or approximately 73.5 percent, reported retail customer
activities,\78\ while 998 were estimated to have no retail customers.
The Department does not have information about how many BDs advise
Retirement Investors, which, as defined in the proposed exemption
include Plan fiduciaries, Plan participants and beneficiaries, and IRA
owners. However, according to one compliance survey, about 52 percent
of IAs provide advice directly to retirement plans.\79\ Assuming the
same percentage of BDs service retirement plans, nearly 2,000 BDs would
be affected by the proposed exemption.\80\ The proposal may also impact
BDs that advise Retirement Investors that are Plan participants or
beneficiaries, or IRA owners, but the Department does not have a basis
to estimate the number of these BDs. The Department assumes that such
BDs would be considered as providing recommendations to retail
customers under the SEC's Regulation Best Interest.
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\78\ Regulation Best Interest Release, 84 FR at 33407.
\79\ 2019 Investment Management Compliance Testing Survey,
Investment Adviser Association (Jun. 18, 2019), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/about/190618_IMCTS_slides_after_webcast_edits.pdf.
\80\ If this assumption is relaxed to include all BDs, the costs
would increase by $1 million for the first year and by $0.02 million
for subsequent years.
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To continue servicing retirement plans with respect to transactions
that otherwise would be prohibited under ERISA and the Code, this group
of BDs would be able to rely on the proposed exemption.\81\ Because BDs
with retail businesses are subject to the SEC's Regulation Best
Interest, they already comply with, or are preparing to comply with,
standards functionally identical to those set forth in the proposed
exemption.
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\81\ The Department's estimate of compliance costs does not
include any state-registered BDs because the exception from SEC
registration for BDs is very narrow. See Guide to Broker-Dealer
Registration, Securities and Exchange Commission (Apr. 2008),
www.sec.gov/reportspubs/investor-publications/divisionsmarketregbdguidehtm.html.
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SEC-Registered Investment Advisers (IAs)
As of December 2018, there were approximately 13,299 SEC-registered
IAs \82\ and 17,268 state-registered IAs.\83\ An IA must register with
the appropriate regulatory authorities, with the SEC or with state
securities authorities. IAs registered with the SEC are generally
larger than state-registered IAs, both in staff and in regulatory
assets under management (RAUM).\84\ SEC-registered IAs that advise
retirement plans and other Retirement Investors would be directly
affected by the proposed exemption.
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\82\ Form CRS Relationship Summary Release at 33564.
\83\ Id. at 33565. (Of these 17,268 state-registered IAs, 125
are also registered with SEC and 204 are also dual registered BDs.)
\84\ After the Dodd-Frank Wall Street Reform and Consumer
Protection Act, an IA with $100 million or more in regulatory assets
under management generally registers with the SEC, while an IA with
less than $100 million registers with the state in which it has its
principle office, subject to certain exceptions. For more details
about the registration of IAs, see General Information on the
Regulation of Investment Advisers, Securities and Exchange
Commission (Mar. 11, 2011), www.sec.gov/divisions/investment/iaregulation/memoia.htm; see also A Brief Overview: The Investment
Adviser Industry, North American Securities Administrators
Association (2019), www.nasaa.org/industry-resources/investment-advisers/investment-adviser-guide/.
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Some IAs are dual-registered as BDs. To avoid double counting when
estimating compliance costs, the Department counted dual-registered
entities as BDs and excluded them from the burden estimates of IAs.\85\
The Department estimates there to be 12,940 SEC-registered IAs, a
figure produced by subtracting the 359 dually-registered IAs from the
13,299 SEC-registered IAs.
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\85\ The Department applied this exclusion rule across all types
of IAs, regardless of registration (SEC registered versus state
only) and retail status (retail versus nonretail).
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Similar to BDs, the Department assumes that about 52 percent of
SEC-registered IAs provide recommendations or services to retirement
plans.\86\ Applying this assumption, the Department estimates that
approximately 6,729 SEC-registered IAs currently service retirement
plans. An inestimable number of IAs may provide advice only to
Retirement Investors that are Plan participants or beneficiaries or IRA
owners, rather than retirement plans. These IAs are fiduciaries, and
they already operate under conditions functionally identical to those
required by the proposed exemption.\87\ Accordingly, the proposed
exemption would pose no more than a nominal burden for these entities.
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\86\ 2019 Investment Management Compliance Testing Survey, supra
note 79.
\87\ SEC Standards of Conduct Rulemaking: What It Means for
RIAs, Investment Adviser Association (July 2019), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/resources/IAA-Staff-Analysis-Standards-of-Conduct-Rulemaking2.pdf.
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State-Registered Investment Advisers
As of December 2018, there were 16,939 state-registered IAs.\88\ Of
these state-registered IAs, 13,793 provide advice to retail investors,
while 3,146 do not.\89\ State-registered IAs tend to be smaller than
SEC-registered IAs, both in RAUM and staff. For example, according to
one survey of both SEC- and state-registered IAs, about 47 percent of
respondent IAs reported 11 to
[[Page 40853]]
50 employees.\90\ In contrast, an examination of state-registered IAs
reveals about 80 percent reported only 0 to 2 employees.\91\ According
to one report, 64 percent of state-registered IAs manage assets under
$30 million.\92\ According to a study by the North American Securities
Administrators Association, about 16 percent of state-registered IAs
provide advice or services to retirement plans.\93\ Based on this
study, the Department assumes that 16 percent of state-registered IAs
advise retirement plans. Thus, the Department estimates that
approximately 2,710 state-registered, nonretail IAs provide advice to
retirement plans and other Retirement Investors.
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\88\ This excludes state-registered IAs that are also registered
with the SEC or dual registered BDs.
\89\ Form CRS Relationship Summary Release.
\90\ 2019 Investment Management Compliance Testing Survey, supra
note 79.
\91\ 2019 Investment Adviser Section Annual Report, North
American Securities Administrators Association (May 2019),
www.nasaa.org/wp-content/uploads/2019/06/2019-IA-Section-Report.pdf.
\92\ 2018 Investment Adviser Section Annual Report, North
American Securities Administrators Association (May 2018),
www.nasaa.org/wp-content/uploads/2018/05/2018-NASAA-IA-Report-Online.pdf.
\93\ 2019 Investment Adviser Section Annual Report, supra note
91.
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Insurers
The proposed exemption would affect insurers. Insurers are
primarily regulated by states, and no single regulator records a
national-level count of insurers. Although state regulators track
insurers, the sum of all insurers cannot be calculated by aggregating
individual state totals because individual insurers often operate in
multiple states. However, the NAIC estimates there were approximately
386 insurers directly writing annuities in 2018. Some of these insurers
may not sell any annuity contracts in the IRA or retirement plan
markets. Furthermore, insurers can rely on other existing exemptions
instead of the proposed exemption. Due to lack of data, the Department
includes all 386 insurers in its cost estimation, although this likely
overestimates costs. The Department invites any comments about how many
insurers would utilize this proposed exemption.
Banks
There are 5,362 federally insured depository institutions in the
United States.\94\ The Department understands that banks most commonly
use ``networking arrangements'' to sell retail non-deposit investment
products (RNDIPs), including, among other products, equities, fixed-
income securities, exchange-traded funds, and variable annuities.\95\
Under such arrangements, bank employees are limited to performing only
clerical or ministerial functions in connection with brokerage
transactions. However, bank employees may forward customer funds or
securities and may describe, in general terms, the types of investment
vehicles available from the bank and BD under the arrangement. Similar
restrictions exist with respect to bank employees' referrals of
insurance products and IAs. Because of the limitations, the Department
believes that in most cases such referrals will not constitute
fiduciary investment advice within the meaning of the proposed
exemption. Due to the prevalence of banks using networking arrangements
for transactions related to RNDIPs, the Department believes that most
banks will not be affected with respect to such transactions.
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\94\ The FDIC reports there are 4,681 Commercial banks and 681
Savings Institutions (thrifts) for 5,362 FDIC- Insured Institutions
as of March 31, 2019. For more details, see Statistics at a Glance,
Federal Deposit Insurance Corporation (Mar. 31, 2019), www.fdic.gov/bank/statistical/stats/2019mar/industry.pdf.
\95\ For more details about ``networking arrangements,'' see
Conflict of Interest Final Rule, Regulatory Impact Analysis for
Final Rule and Exemptions, U.S. Department of Labor (Apr. 2016),
www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
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The Department does not have sufficient data to estimate the costs
to banks of any other investment advice services because it does not
know how frequently banks use their own employees to perform activities
that would be otherwise prohibited. The Department invites comments on
the magnitude of such costs and welcomes submission of data that would
facilitate their quantification.
Costs Associated With Disclosures
The Department estimates the compliance costs associated with the
disclosure requirement would be approximately $1 million in the first
year and $0.3 million per year in each subsequent year.\96\
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\96\ Except where specifically noted, all cost estimates are
expressed in 2019 dollars throughout this document.
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Section II(b) of the proposed exemption would require Financial
Institutions to acknowledge, in writing, their status as fiduciaries
under ERISA and the Code. In addition, the institutions must furnish a
written description of the services they provide and any material
conflicts of interest. For many entities, including IAs, this condition
would impose only modest additional costs, if any at all. Most IAs
already disclose their status as a fiduciary and describe the types of
services they offer in Form ADV. BDs with retail investors are also
required, as of June 30, 2020, to provide disclosures about services
provided and conflicts of interest on Form CRS and pursuant to the
disclosure obligation in Regulation Best Interest. Even among entities
that currently do not provide such disclosures, such as insurers and
some BDs, the Department believes that developing disclosures required
in this proposed exemption would not substantially increase costs
because the required disclosures are clearly specified and limited in
scope.
Not all entities will decide to use the proposed exemption. Some
may instead rely on other existing exemptions that better align with
their business models. However, for the cost estimation, the Department
assumes that all eligible entities would use the proposed exemption and
incur, on average, modest costs.
The Department estimates that developing disclosures that
acknowledge fiduciary status and describe the services offered and any
material conflicts of interest would incur costs of approximately $0.7
million in the first year.\97\
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\97\ A written acknowledgment of fiduciary status would cost
approximately $0.2 million, while a written description of the
services offered and any material conflicts of interest would cost
another $0.5 million. The Department assumes that 11,782 Financial
Institutions, comprising 1,957 BDs, 6,729 SEC-registered IAs, 2,710
state-registered IAs, and 386 insurers, are likely to engage in
transactions covered under this PTE. For a detailed description of
how the number of entities is estimated, see the Paperwork Reduction
Act section, below. The $0.2 million costs associated with a written
acknowledgment of fiduciary status are calculated as follows. The
Department assumes that it will take each retail BD firm 15 minutes,
each nonretail BD or insurance firm 30 minutes, and each registered
IA 5 minutes to prepare a disclosure conveying fiduciary status at
an hourly labor rate of $138.41, resulting in cost burden of
$221,276. Accordingly, the estimated per-entity cost ranges from
$11.53 for IAs to $69.21 for non-retail BDs and insurers. The $0.5
million costs associated with a written description of the services
offered and any material conflicts of interest are calculated as
follows. The Department assumes that it will take each retail BD or
IA firm 5 minutes, each small nonretail BD or small insurer 60
minutes, and each large nonretail BDs or larger insurer 5 hours to
prepare a disclosure conveying services provided and any conflicts
of interest at an hourly labor rate of $138.41, resulting in cost
burden of $510,877. Accordingly, the estimated per-entity cost
ranges from $11.53 for retail broker-dealers and IAs to $692.07 for
large non-retail BDs and insurers.
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The Department estimates that it would cost Financial Institutions
about $0.3 million to print and mail required disclosures to Retirement
Investors,\98\
[[Page 40854]]
but it assumes most required disclosures would be electronically
delivered to plan fiduciaries. The Department assumes that
approximately 92 percent of participants who roll over their plan
assets to IRAs would receive required disclosures electronically.\99\
According to one study, approximately 3.6 million accounts in
retirement plans were rolled over to IRAs in 2018.\100\ Of those, about
half, 1.8 million, were rolled over by financial services
professionals.\101\ Therefore, prior to transactions necessitated by
rollovers, participants are likely to receive required disclosures from
their Investment Professionals. In some cases, Financial Institutions
and Investment Professionals may send required disclosures to
participants, particularly those with participant-directed defined
contribution accounts, before providing investment advice. The
Department welcomes comments that speak to the costs associated with
required disclosures.
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\98\ The Department estimates that approximately 1.8 million
Retirement Investors are likely to engage in transactions covered
under this PTE, of which 8.1 percent are estimated to receive paper
disclosures. Distributing paper disclosures is estimated to take a
clerical professional 1 minute per disclosure, at an hourly labor
rate of $64.11, resulting in a cost burden of $156,094. Assuming the
disclosures will require two sheets of paper at a cost $0.05 each,
the estimated material cost for the paper disclosures is $14,608.
Postage for each paper disclosure is expected to cost $0.55,
resulting in a printing and mailing cost of $94,954.
\99\ The Department estimates approximately 56.4 percent of
participants receive disclosures electronically based on data from
various data sources including the National Telecommunications and
Information Agency (NTIA). In light of the 2019 Electronic
Disclosure Regulation, the Department estimates that additional 35.5
percent of participants receive them electronically. In total, 91.9
percent of participants are expected to receive disclosures
electronically.
\100\ U.S. Retirement-End Investor 2019: Driving Participant
Outcomes with Financial Wellness Programs, The Cerulli Report
(2019).
\101\ Id.
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Costs Associated With Written Policies and Procedures
The Department estimates that developing policies and procedures
prudently designed to ensure compliance with the Impartial Conduct
Standards would cost approximately $1.7 million in the first year.\102\
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\102\ The Department assumes that 11,782 Financial Institutions,
comprising 1,957 BDs, 6,729 SEC-registered IAs, 2,710 state-
registered IAs, and 386 insurers, are likely to engage in
transactions covered under this PTE. For a detailed description of
how the number of entities is estimated, see the Paperwork Reduction
Act section, below. The Department assumes that it will take a legal
professional, at an hourly labor rage of $138.41, 22.5 minutes at
each small retail BD, 45 minutes at each large retail BD, 5 hours at
each small nonretail BD, 10 hours at each large nonretail BD, 15
minutes at each small IA, 30 minutes at each large IA, 5 hours at
each small insurer, and 10 hours at each large insurer to meet the
requirement. This results in a cost burden estimate of $1,664,127.
Accordingly, the estimated per-entity cost ranges from $34.60 for
small IAs to $1,384.14 for large non-retail BDs and insurers. These
compliance cost estimates are not discounted.
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The estimated compliance costs reflect the different regulatory
baselines under which different entities are currently operating. For
example, IAs already operate under a standard functionally identical to
that required under the proposed exemption,\103\ and report how they
address conflicts of interests in Form ADV.\104\ Similarly, BDs subject
to the SEC's Regulation Best Interest also operate, or are preparing to
operate, under a standard that is functionally identical to the
proposed exemption. To comply fully with the proposed exemption,
however, these entities may need to review their policies and
procedures and amend their existing policies and procedures. These
additional steps would impose additional, but not substantial, costs at
the Financial Institution level.
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\103\ See SEC Fiduciary Standard of Conduct Interpretation
(Release No. IA-5248); see also A Brief Overview: The Investment
Adviser Industry, North American Securities Administrators
Association (2019), www.nasaa.org/industry-resources/investment-advisers/investment-adviser-guide/. (According to the NASAA, the
anti-fraud provisions of the Investment Advisers Act of 1940, the
NASAA Model Rule 102(a)(4)-1, and most state laws require IAs to act
as fiduciaries. NASAA further states, ``Fiduciary duty requires the
adviser to hold the client's interest above its own in all matters.
Conflicts of interest should be avoided at all costs. However, there
are some conflicts that will inevitably occur . . . In these
instances, the adviser must take great pains to clearly and
accurately describe those conflicts and how the adviser will
maintain impartiality in its recommendations to clients.''
\104\ See Form ADV [17 CFR 279.1] (Part 2A of Form ADV requires
IAs to prepare narrative brochures that contain information such as
the types of advisory services offered, fee schedule, disciplinary
information and conflicts of interest. For example, item 10.C of
part 2A asks IAs to identify if certain relationships or
arrangements create a material conflict of interest, and to describe
the nature of the conflict and how to address it. If an IA
recommends other IAs for its clients and the IA receives
compensation directly or indirectly from those advisers that creates
a material conflict of interest or the IA has other business
relationships with those advisers that create a material conflict of
interest, Item 10.D of Part 2A requires the IA to discuss the
material conflicts of interest that these practices create and how
to address them.)
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The insurers and non-retail BDs currently operating under a
suitability standard in most states and largely relying on transaction-
based forms of compensation, such as commissions, would be required to
establish written policies and procedures that comply with the
Impartial Conduct Standards, if they choose to use this proposed
exemption. These activities would likely involve higher cost increases
than those experienced by IAs and retail BDs. To a large extent,
however, the entities facing potentially higher costs would likely
elect to rely on other existing exemptions. In this regard, the burden
estimates on these entities are likely overestimated to the extent that
many of these entities would not use this proposed exemption.
Because smaller entities generally have less complex business
practices and arrangements than their larger counterparts, it would
likely cost less for them to comply with the proposed exemption. This
is reflected in the compliance cost estimates presented in this
economic analysis.
Costs Associated With Annual Report of Retrospective Review
Section II(d) would require Financial Institutions to conduct an
annual retrospective review reasonably designed to assist the Financial
Institution in detecting and preventing violations of, and achieving
compliance with the Impartial Conduct Standards and their own policies
and procedures, and to produce a written report that is certified by
the institution's chief executive officer. The Department estimates
that this requirement will impose $1.7 million in costs each year.\105\
FINRA requires BDs to establish and maintain a supervisory system
reasonably designed to facilitate compliance with applicable securities
laws and regulations,\106\ to test the supervisory system, and to amend
the system based on the testing.\107\ Furthermore, the BD's chief
executive officer (or equivalent officer) must annually certify that it
has processes in place to establish, maintain, test, and modify written
compliance policies and written supervisory procedures reasonably
designed to achieve compliance with FINRA rules.\108\
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\105\ The Department assumes that 794 Financial Institutions,
comprising 20 BDs, 538 SEC-registered IAs, 217 state-registered IAs,
and 20 insurers, would be likely to incur costs associated with
producing a retrospective review report. The Department estimates it
will take a legal professional, at an hourly labor rate of $138.41,
5 hours for small firms and 10 hours for large firms to produce a
retrospective review report, resulting in an estimated cost burden
of $973,297. The estimate per-entity cost ranges from $692.07 for
small entities to $1,384.14 for large entities. Additionally, the
Department assumes that 9,845 Financial Institutions, comprising 20
BDs, 6,729 SEC-registered IAs, 2,710 state-registered IAs, and 386
insurers, would be likely to incur costs associated with reviewing
and certifying the report. The Department estimates it will take a
legal professional 15 minutes for small firms and 30 minutes for
large firms to review the report and certify the exemption,
resulting in an estimated cost burden of $718,806. The estimated
per-entity cost ranges from $41.41 for small entities to $82.82 for
large entities. For a detailed description of how the number of
entities for each cost burden is estimated, see the Paperwork
Reduction Act section.
\106\ Rule 3110. Supervision, FINRA Manual, www.finra.org/rules-guidance/rulebooks/finra-rules/3110.
\107\ Rule 3120. Supervisory Control System, FINRA Manual,
www.finra.org/rules-guidance/rulebooks/finra-rules/3120.
\108\ Rule 3130. Annual Certification of Compliance and
Supervisory Processes, FINRA Manual, www.finra.org/rules-guidance/rulebooks/finra-rules/3130.
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[[Page 40855]]
Many insurers are already subject to similar standards.\109\ For
instance, the NAIC's Model Regulation contemplates that insurers
establish a supervision system that is reasonably designed to comply
with the Model Regulation and annually provide senior management with a
written report that details findings and recommendations on the
effectiveness of the supervision system.\110\ States that have adopted
the Model Regulation also require insurers to conduct annual audits and
obtain certifications from senior managers. Based on these regulatory
baselines, the Department believes the compliance costs attributable to
this requirement would be modest.
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\109\ The previous NAIC Suitability in Annuity Transactions
Model Regulation (2010) had been adopted by many states before the
newer NAIC Model Regulation was approved in 2020. Both previous and
updated Model Regulations contain similar standards as written
report of retrospective review conditions of the proposed exemption.
\110\ NAIC Suitability in Annuity Transactions Model Regulation,
Spring 2020, Section 6.C.(2)(i), available at https://www.naic.org/store/free/MDL-275.pdf. (The same requirement is found in the
previous NAIC Suitability in Annuity Transactions Model Regulation
(2010), section 6.F.(1)(f).)
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SEC-registered IAs are already subject to Rule 206(4)-7, which
requires them to adopt and implement written policies and procedures
reasonably designed to ensure compliance with the Advisers Act and
rules adopted thereunder and review them annually for adequacy and the
effectiveness of their implementation. Under the same rule, SEC-
registered IAs must designate a chief compliance officer to administer
the policies and procedures. However, they are not required to conduct
an internal audit nor produce a report detailing findings from its
audit. Nonetheless, many seem to voluntarily produce reports after
conducting internal audits. One compliance testing survey reveals that
about 92 percent of SEC-registered IAs voluntarily provide an annual
compliance program review report to senior management.\111\ Relying on
this information, the Department estimates that only 8 percent of SEC-
registered IAs advising retirement plans would incur costs associated
with producing a retrospective review report. The rest would incur
minimal costs to satisfy the conditions related to this requirement.
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\111\ 2018 Investment Management Compliance Testing Survey,
Investment Adviser Association (Jun. 14, 2018), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/2018-Investment-Management_Compliance-Testing-Survey-Results-Webcast_pptx.pdf.
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Due to lack of data, the Department based the cost estimates
associated with state-registered IAs on the assumption that 8 percent
of state-registered IAs advising retirement plans currently do not
produce compliance review reports, and thus would incur costs
associated with the oversight conditions in the proposed exemption. As
discussed above, compared with SEC-registered IAs, state-registered IAs
tend to be smaller in terms of RAUM and staffing, and thus may not have
formal procedures in place to conduct retrospective reviews to ensure
regulatory compliance. If that were often the case, the Department's
assumption would likely underestimate costs. However, because state-
registered IAs tend to be smaller than their SEC-registered
counterparts, they tend to handle fewer transactions, limit the range
of transactions they handle, and have fewer employees to supervise.
Therefore, the costs associated with establishing procedures to conduct
internal retrospective reviews and produce compliance reports would
likely be low. In sum, the Department estimates that the costs
associated with the retrospective review requirement of the proposed
exemption would be approximately $1.7 million each year.
Costs Associated With Rollover Documentation
In 2018, slightly more than 3.6 million retirement plan accounts
rolled over to an IRA, while slightly less than 0.5 million accounts
were rolled over to other retirement plans.\112\ Not all rollovers were
managed by financial services professionals. As discussed above, about
half of all rollovers from plans to IRAs were handled by financial
services professionals, while the rest were self-directed.\113\ Based
on this information, the Department estimates approximately 1.8 million
participants obtained advice from financial services
professionals.\114\ Some of these rollovers likely involved financial
services professionals who were not fiduciaries under the five-part
test, thus the actual number of rollovers affected by this proposed
exemption is likely lower than 1.8 million. The proposed exemption
would require the Financial Institution to document why a recommended
rollover is in the best interest of the Retirement Investor. As a best
practice, the SEC already encourages firms to record the basis for
significant investment decisions such as rollovers, although doing so
is not required under Regulation Best Interest.\115\ In addition, some
firms may voluntarily document significant investment decisions to
demonstrate compliance with applicable law, even if not required.\116\
Therefore, the Department expects that many Financial Institutions
already document significant decisions like rollovers.
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\112\ U.S. Retirement-End Investor 2019, supra note 100. (To
estimate costs associated with documenting rollovers, the Department
did not include rollovers from plans to plans because plan-to-plan
rollovers are unlikely to be mediated by Investment Professionals.
Also plan-to-plan rollovers occur far less frequently than plan-to-
IRA rollovers. Thus, even if plan-to-plan rollovers were included in
the cost estimation, the impact would likely be small.)
\113\ Id.
\114\ Another report suggested a higher share, 70 percent of
households owning IRAs held their IRAs through Investment
Professionals. Note that this is household level data based on an
IRA owners' survey, which was not particularly focused on rollovers.
(See Sarah Holden & Daniel Schrass, ``The Role of IRAs in US
Households' Saving for Retirement, 2018,'' ICI Research Perspective,
vol. 24, no. 10 (Dec. 2018).)
\115\ Regulation Best Interest Release, 84 FR at 33360.
\116\ According to a comment letter about the proposed
Regulation Best Interest, BDs have a strong financial incentive to
retain records necessary to document that they have acted in the
best interest of clients, even if it is not required. Another
comment letter about the proposed Regulation Best Interest suggests
that BDs generally maintain documentation for suitability purposes.
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In estimating costs associated with rollover documentations, the
Department faces uncertainty with regards to the number of rollovers
that would be affected by the proposed exemption. Given this
uncertainty, below the Department discusses a range of cost estimates.
For the lower-end cost estimate, the Department estimates that the
costs for documenting the basis for investment decisions would come to
$15 million per year.\117\ This low-end estimate is based on the
assumption that most financial services professionals already
incorporate documenting rollover justifications in their regular
business practices and another assumption that not all rollovers are
handled by financial services professionals who act in a fiduciary
[[Page 40856]]
capacity.\118\ For the upper-end cost estimate, the Department assumes
that all rollovers involving financial services professionals would be
affected by the proposed exemption. Then the estimated costs would come
to $59 million per year.\119\ For the primary cost estimate, the
Department assumes that 67.4 percent of rollovers involving financial
services professionals would be affected by the proposed
exemption.\120\ Under this assumption, the estimated costs would be $40
million per year.\121\ The Department acknowledges that uncertainty
still remains as some financial services professionals who do not
generally serve as fiduciaries of their Plan clients may act in a
fiduciary capacity in certain rollover recommendations, and thus would
be affected by the proposed exemption. Alternatively, the opposite can
be true: Financial services professionals who usually serve as
fiduciaries of their Plan clients may act in a non-fiduciary capacity
in certain rollover recommendations, and thus would not be affected by
the proposed exemption. The Department welcomes any comments and data
that can help more precisely estimating the number of rollovers
affected by the exemption. In addition, the Department invites comments
about financial services professionals' practices about documenting
rollover recommendations, particularly whether financial services
professionals often utilize a form with a list of common reasons for
rollovers and how long on average it would take for a financial
services professional to document a rollover recommendation.\122\
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\117\ For those rollovers affected by this proposed exemption it
would take, on average, 10 minutes per rollover to document
justifications. Thus, the Department estimates almost 75,500 burden
hours in aggregate and slightly less than $15 million assuming
$194.77 hourly rate for personal financial advisor. The Department
assumes that financial services professionals would spend on average
10 minutes to document the basis for rollover recommendations. The
Department understands that financial services professionals seek
and gather information regarding to investor profiles in accordance
with other regulators' rules. Further, financial professionals often
discuss the basis for their recommendations and associated risks
with their clients as a best practice. After collecting relevant
information and discussing the basis for certain recommendations
with clients, the Department believes that it would take relatively
short time to document justifications for rollover recommendations.
\118\ To estimate costs, the Department further assumes that
approximately 50 percent of 1.8 million rollovers involve financial
professionals who already document rollover recommendations as a
best practice. Additionally, the Department assumes half of the
remaining half of rollovers, thus an additional quarter of the total
1.8 million rollovers, are handled by financial professionals who
act in a non-fiduciary capacity. Thus the Department assumes that
approximately three-quarters of 1.8 million rollovers would not be
affected by the proposed exemption, while one-quarter of 1.8 million
rollovers would be affected.
\119\ Assuming that it would take, on average, 10 minutes per
rollover to document justifications, the Department estimates about
301,850 burden hours in aggregate and slightly less than $59 million
assuming $194.77 hourly rate for personal financial advisor.
\120\ In 2019, a survey was conducted to financial services
professionals who hold more than 50 percent of their practice's
assets under management in employer-sponsored retirement plans.
These financial services professionals include both BDs and IAs. In
addition, 45 percent of those professionals indicated that they make
a proactive effort to pursue IRA rollovers from their DC plan
clients. According to this survey, approximately 32.6 percent
responded that they function in a non-fiduciary capacity. Therefore,
the Department assumes that approximately 67.4 percent of financial
service professionals serve their Plan clients as fiduciaries. See
U.S. Defined Contribution 2019: Opportunities for Differentiation in
a Competitive Landscape, The Cerulli Report (2019).
\121\ Assuming that it would take, on average, 10 minutes per
rollover to document justifications, the Department estimates over
203,000 burden hours in aggregate and slightly less than $40 million
assuming $194.77 hourly rate for personal financial advisor.
\122\ The Department assumes that financial services
professionals would spend on average 10 minutes to document the
basis for rollover recommendations. The Department understands that
financial services professionals seek and gather information
regarding to investor profiles in accordance with other regulators'
rules. Further, financial professionals often discuss the basis for
their recommendations and associated risks with their clients as a
best practice. After collecting relevant information and discussing
the basis for certain recommendations with clients, the Department
believes that it would take relatively short time to document
justifications for rollover recommendations. However, the Department
welcomes comments about the burden hours associated with documenting
rollover recommendations.
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Costs Associated With Recordkeeping
Section IV of the proposed exemption would require Financial
Institutions to maintain records demonstrating compliance with the
exemption for 6 years. The Financial Institutions would also be
required to make records available to regulators, Plans, and
participants. Recordkeeping requirements in Section IV are generally
consistent with requirements made by the SEC and FINRA.\123\ In
addition, the recordkeeping requirements correspond to the 6-year
period in section 413 of ERISA. The Department understands that many
firms already maintain records, as required in Section IV, as part of
their regular business practices. Therefore, the Department expects
that the recordkeeping requirement in Section IV would impose a
negligible burden.\124\ The Department welcomes comments regarding the
burden associated with the recordkeeping requirement.
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\123\ The SEC's Regulation Best Interest amended Rule 17a-
4(e)(5) to require that BDs retain all records of the information
collected from or provided to each retail customer pursuant to
Regulation Best Interest for at least 6 years after the earlier of
the date the account was closed or the date on which the information
was last replaced or updated. FINRA Rule 4511 also requires its
members preserve for a period of at least 6 years those FINRA books
and records for which there is no specified period under the FINRA
rules or applicable Exchange Act rules.
\124\ The Department notes that insurers that are expected to
use the proposed exemption are generally not subject to the SEC's
Regulation Best Interest and FINRA rules. The Department
understands, however, that some states' insurance regulations
require insurers to retain similar records for less than six years.
For example, some states require insurers to maintain records for
five years after the insurance transaction is completed. Thus, the
recordkeeping requirement of the proposed exemption would likely
impose additional burden on the 386 insurers that the Department
estimates would rely on this proposed exemption. However, the
Department expects most insurers to maintain records electronically.
Electronic storage prices have decreased substantially as cloud
services become more widely available. For example, cloud storage
space costs on average $0.018 to $0.021 per GB per month. Some
estimate that approximately 250,000 PDF files or other typical
office documents can be stored on 100GB. Accordingly, the Department
believes that maintaining records in electronic storage for an
additional year or two would not impose a significant cost burden on
the affected 386 insurers. (For more detailed pricing information of
three large cloud service providers, see https://cloud.google.com/products/calculator; or https://azure.microsoft.com/en-us/pricing/calculator/; or https://calculator.s3.amazonaws.com/.) The
Department welcomes comments on this assessment and the effect of
the recordkeeping requirement on insurers.
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Regulatory Alternatives
The Department considered various alternative approaches in
developing this proposed exemption. Those alternatives are discussed
below.
No New Exemption
The Department considered merely leaving in place the existing
exemptions that provide prohibited transaction relief for investment
advice transactions. However, the existing exemptions generally apply
to more limited categories of transactions and investment products, and
they include conditions that are tailored to the particular
transactions or products covered under each exemption. Therefore, under
the existing exemptions, Financial Institutions may find it inefficient
to implement advice programs for all of the different products and
services they offer. By providing a single set of conditions for all
investment advice transactions, this proposal aims to promote the use
and availability of investment advice for all types of transactions in
a manner that aligns with the conduct standards of other regulators,
such as the SEC.
Including an Independent Audit Requirement in the Proposed Exemption
The proposal would require Financial Institutions to conduct a
retrospective review, at least annually, designed to detect and prevent
violations of the Impartial Conduct Standards, and to ensure compliance
with the policies and procedures governing the exemption. The exemption
does not require that the review be conducted by an independent party,
allowing Financial Institutions to self-review.
As an alternative to this approach, the Department considered
requiring independent audits to ensure compliance under the exemption.
The Department decided against this
[[Page 40857]]
approach to avoid the significant cost burden that this requirement
would impose. The proposal instead requires that Financial Institutions
provide a written report documenting the retrospective review, and
supporting information, to the Department and other regulators within
10 business days of a request. The Department believes this proposed
requirement compels Financial Institutions to take the review
obligation seriously, regardless of whether they choose to hire an
independent auditor to conduct the review.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
provide the general public and Federal agencies with an opportunity to
comment on proposed and continuing collections of information in
accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C.
3506(c)(2)(A)). This helps to ensure that the public understands the
Department's collection instructions, respondents can provide the
requested data in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the Department can properly assess the impact of
collection requirements on respondents.
Currently, the Department is soliciting comments concerning the
proposed information collection request (ICR) included in the proposed
Improving Investment Advice for Workers & Retirees (``Proposed PTE'').
A copy of the ICR may be obtained by contacting the PRA addressee shown
below or at www.RegInfo.gov.
The Department has submitted a copy of the Proposed PTE to the
Office of Management and Budget (OMB) in accordance with 44 U.S.C.
3507(d) for review of its information collections. The Department and
OMB are particularly interested in comments that:
Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronic submission of responses).
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC, 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. OMB requests that comments
be received within 30 days of publication of the Proposed PTE to ensure
their consideration.
PRA Addressee: Address requests for copies of the ICR to G.
Christopher Cosby, Office of Policy and Research, U.S. Department of
Labor, Employee Benefits Security Administration, 200 Constitution
Avenue NW, Room N-5718, Washington, DC, 20210. Telephone (202) 693-
8425; Fax: (202) 219-5333. These are not toll-free numbers. ICRs
submitted to OMB also are available at www.RegInfo.gov.
As discussed in detail below, the Proposed PTE would require
Financial Institutions and/or their Investment Professionals to (1)
make certain disclosures to Retirement Investors, (2) adopt written
policies and procedures, (3) document the basis for rollover
recommendations, (4) prepare a written report of the retrospective
review, and (5) maintain records showing that the conditions have been
met to receive relief under the proposed exemption. These requirements
are ICRs subject to the Paperwork Reduction Act.
The Department has made the following assumptions in order to
establish a reasonable estimate of the paperwork burden associated with
these ICRs:
Disclosures distributed electronically will be distributed
via means already used by respondents in the normal course of business,
and the costs arising from electronic distribution will be negligible;
Financial Institutions will use existing in-house
resources to prepare the disclosures, policies and procedures, rollover
documentations, and retrospective reviews, and to maintain the
recordkeeping systems necessary to meet the requirements of the
Proposed PTE;
A combination of personnel will perform the tasks
associated with the ICRs at an hourly wage rate of $194.77 for a
personal financial advisor, $64.11 for mailing clerical personnel, and
$138.41 for a legal professional; \125\
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\125\ The Department's 2018 hourly wage rate estimates include
wages, benefits, and overhead, and are calculated as follows: mean
wage data from the 2018 National Occupational Employment Survey (May
2018, www.bls.gov/news.release/archives/ocwage_03292019.pdf), wages
as a percent of total compensation from the Employer Cost for
Employee Compensation (December 2018, www.bls.gov/news.release/archives/ecec_03192019.pdf), and overhead cost corresponding to each
2-digit NAICS code from the Annual Survey of Manufacturers (December
2017, www.census.gov/data/Tables/2016/econ/asm/2016-asm.html)
multiplied by the percent of each occupation within that NAICS
industry code based on a matrix of detailed occupation employment
for each NAICS industry from the BLS Office of Employment
projections (2016, www.bls.gov/emp/data/occupational-data.htm).
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Approximately 11,782 Financial Institutions will take
advantage of the Proposed PTE and they will use the Proposed PTE in
conjunction with transactions involving nearly all of their clients
that are defined benefit plans, defined contribution plans, and IRA
holders.\126\
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\126\ For this analysis, ``IRA holders'' include rollovers from
ERISA plans. The Department welcomes comments on this estimate.
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Disclosures, Documentation, Retrospective Review, and Recordkeeping
Section II(b) of the Proposed PTE would require Financial
Institutions to furnish Retirement Investors with a disclosure prior to
engaging in a covered transaction. Section II(b)(1) would require
Financial Institutions to acknowledge in writing that the Financial
Institution and its Investment Professionals are fiduciaries under
ERISA and the Code, as applicable, with respect to any investment
advice provided to the Retirement Investors. Section II(b)(2) would
require Financial Institutions to provide a written description of the
services they provide and any material conflicts of interest. The
written description must be accurate in all material respects.
Financial Institutions will generally be required to provide the
disclosure to each Retirement Investor once, but Financial Institutions
may need to provide updated disclosures to ensure accuracy.
Section II(c)(1) of the Proposed PTE would require Financial
Institutions to establish, maintain, and enforce written policies and
procedures prudently designed to ensure that they and their Investment
Professionals comply with the Impartial Conduct Standards. Section
II(c)(2) would further require that the Financial Institutions design
the policies and procedures to mitigate conflicts of interest.
[[Page 40858]]
Section II(c)(3) of the Proposed PTE would require Financial
Institutions to document the specific reasons for any rollover
recommendation and show that the rollover is in the best interest of
the Retirement Investor.
Under Section II(d) of the Proposed PTE, Financial Institutions
would be required to conduct an annual retrospective review that is
reasonably designed to prevent violations of the Proposed PTE's
Impartial Conduct Standards and the institution's own policies and
procedures. The methodology and results of the retrospective review
would be reduced to a written report that is provided to the Financial
Institution's chief executive officer and chief compliance officer (or
equivalent officers). The chief executive officer would be required to
certify that (1) the officer has reviewed the report of the
retrospective review, and (2) the Financial Institution has in place
policies and procedures prudently designed to achieve compliance with
the conditions of the Proposed PTE, and (3) the Financial Institution
has a prudent process for modifying such policies and procedures. The
process for modifying policies and procedures would need to be
responsive to business, regulatory, and legislative changes and events,
and the chief executive officer would be required to periodically test
their effectiveness. The review, report, and certification would be
completed no later than 6 months following the end of the period
covered by the review. The Financial Institution would be required to
retain the report, certification, and supporting data for at least 6
years, and to make these items available to the Department, any other
federal or state regulator of the Financial Institution, or any
applicable self-regulatory organization within 10 business days.
Section IV sets forth the recordkeeping requirements in the
Proposed PTE.
Production and Distribution of Required Disclosures
The Department assumes that 11,782 Financial Institutions,
comprising 1,957 BDs,\127\ 6,729 SEC-registered IAs,\128\ 2,710 state-
registered IAs,\129\ and 386 insurers,\130\ are likely to engage in
transactions covered under this PTE. Each would need to provide
disclosures that (1) acknowledge its fiduciary status and (2) identify
the services it provides and any material conflicts of interest. The
Department estimates that preparing a disclosure indicating fiduciary
status would take a legal professional between 5 and 30 minutes,
depending on the nature of the business,\131\ resulting in an hour
burden of 1,599 \132\ and a cost burden of $221,276.\133\ Preparing a
disclosure identifying services provided and conflicts of interest
would take a legal professional an estimated 5 minutes to 5 hours,
depending on the nature of the business,\134\ resulting in an hour
burden of 3,691 \135\ and an equivalent cost burden of $510,877.\136\
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\127\ The SEC estimated that there were 3,764 BDs as of December
2018 (see Form CRS Relationship Summary Release). The IAA Compliance
2019 Survey estimates that 52 percent of IAs have a pension
consulting business. The estimated number of BDs affected by this
exemption is the product of the SEC's estimate of total BDs in 2018
and IAA's estimate of the percent of IAs with a pension consulting
business.
\128\ The SEC estimated that there were 12,940 SEC-registered
IAs that were not dually registered as BDs as of December 2018 (see
Form CRS Relationship Summary Release). The IAA Compliance 2019
Survey estimates that 52 percent of IAs have a pension consulting
business. The estimated number of IAs affected by this exemption is
the product of the SEC's estimate of SEC-registered IAs in 2018 and
the IAA's estimate of the percent of IAs with a pension consulting
business.
\129\ The SEC estimated that there were 16,939 state-registered
IAs that were not dually registered as BDs as of December 2018 (see
Form CRS Relationship Summary Release). The NASAA 2019 estimates
that 16 percent of state-registered IAs have a pension consulting
business. The estimated number of state-registered IAs affected by
this exemption is the product of the SEC's estimate of state-
registered IAs in 2018 and NASAA's estimate of the percent of state-
registered IAs with a pension consulting business.
\130\ NAIC estimates that the number of insurers directly
writing annuities as of 2018 is 386.
\131\ The Department assumes that it will take each retail BD
firm 15 minutes, each nonretail BD or insurance firm 30 minutes, and
each registered IA 5 minutes to prepare a disclosure conveying
fiduciary status.
\132\ Burden hours are calculated by multiplying the estimated
number of each firm type by the estimated time it will take each
firm to prepare the disclosure.
\133\ The hourly cost burden is calculated by multiplying the
burden hour of each firm associated with preparation of the
disclosure by the hourly wage of a legal professional.
\134\ The Department assumes that it will take each retail BD or
IA firm 5 minutes, each small nonretail BD or small insurer 60
minutes, and each large nonretail BDs or larger insurer 5 hours to
prepare a disclosure conveying services provided and any conflicts
of interest.
\135\ Burden hours are calculated by multiplying the estimated
number of each firm type by the estimated time it will take each
firm to prepare the disclosure.
\136\ The hourly cost burden is calculated by multiplying the
burden hour of each firm associated with preparation of the
disclosure by the hourly wage of a legal professional.
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The Department estimates that approximately 1.8 million Retirement
Investors \137\ have relationships with Financial Institutions and are
likely to engage in transactions covered under this PTE. Of these 1.8
million Retirement Investors, it is assumed that 8.1 percent \138\ or
146,083 Retirement Investors, would receive paper disclosures.
Distributing paper disclosures is estimated to take a clerical
professional 1 minute per disclosure, resulting in an hourly burden of
2,435 \139\ and an equivalent cost burden of $156,094.\140\ Assuming
the disclosures will require two sheets of paper at a cost $0.05 each,
the estimated material cost for the paper disclosures is $14,608.
Postage for each paper disclosure is expected to cost $0.55, resulting
in a printing and mailing cost of $94,954.
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\137\ The Department estimates the number of affected plans and
IRAs be equal to 50 percent of rollovers from plans to IRAs. Cerulli
has estimated the number of plans rolled into IRAs to be 3,622,198
(see U.S. Retirement-End Investor 2019, supra note 100).
\138\ According to data from the National Telecommunications and
Information Agency (NTIA), 37.7 percent of individuals age 25 and
over have access to the internet at work. According to a Greenwald &
Associates survey, 84 percent of plan participants find it
acceptable to make electronic delivery the default option, which is
used as the proxy for the number of participants who will not opt-
out of electronic disclosure if automatically enrolled (for a total
of 31.7 percent receiving electronic disclosure at work).
Additionally, the NTIA reports that 40.5 percent of individuals age
25 and over have access to the internet outside of work. According
to a Pew Research Center survey, 61 percent of internet users use
online banking, which is used as the proxy for the number of
internet users who will affirmatively consent to receiving
electronic disclosures (for a total of 24.7 percent receiving
electronic disclosure outside of work). Combining the 31.7 percent
who receive electronic disclosure at work with the 24.7 percent who
receive electronic disclosure outside of work produces a total of
56.4 percent who will receive electronic disclosure overall. In
light of the 2019 Electronic Disclosure Regulation, the Department
estimates that 81.5 percent of the remaining 43.6 percent of
individuals will receive the disclosures electronically. In total,
91.9 percent of participants are expected to receive disclosures
electronically.
\139\ Burden hours are calculated by multiplying the estimated
number of plans receiving the disclosures non-electronically by the
estimated time it will take to prepare the physical disclosure.
\140\ The hourly cost burden is calculated as the burden hours
associated with the physical preparation of each non-electronic
disclosure by the hourly wage of a clerical professional.
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Written Policies and Procedures Requirement
The Department assumes that 11,782 Financial Institutions,
comprising 1,957 BDs,\141\ 6,729 SEC-registered IAs,\142\
[[Page 40859]]
2,710 state registered IAs,\143\ and 386 insurers,\144\ are likely to
engage in transactions covered under this PTE. The Department estimates
that establishing, maintaining, and enforcing written policies and
procedures prudently designed to ensure compliance with the Impartial
Conduct Standards will take a legal professional between 15 minutes and
10 hours, depending on the nature of the business.\145\ This results in
an hour burden of 12,023 \146\ and an equivalent cost burden of
$1,664,127.\147\
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\141\ The SEC estimated that there were 3,764 BDs as of December
2018 (see Form CRS Relationship Summary Release). The IAA Compliance
2019 Survey estimates that 52 percent of IAs have a pension
consulting business. The estimated number of BDs affected by this
exemption is the product of the SEC's estimate of total BDs in 2018
and IAA's estimate of the percent of IAs with a pension consulting
business.
\142\ The SEC estimated that there were 12,940 SEC-registered
IAs, who were not dually registered as BDs, as of December 2018 (see
Form CRS Relationship Summary Release). The IAA Compliance 2019
Survey estimates that 52 percent of IAs have a pension consulting
business. The estimated number of IAs affected by this exemption is
the product of the SEC's estimate of SEC-registered IAs in 2018 and
IAA's estimate of the percent of IAs with a pension consulting
business.
\143\ The SEC estimated that there were 16,939 state-registered
IAs who were not dually registered as BDs as of December 2018 (see
Form CRS Relationship Summary Release). The NASAA 2019 estimates
that 16 percent of state-registered IAs have a pension consulting
business. The estimated number of state-registered IAs affected by
this exemption is the product of the SEC's estimate of state-
registered IAs in 2018 and NASAA's estimate of the percent of state-
registered IAs with a pension consulting business.
\144\ NAIC estimates that 386 insurers were directly writing
annuities as of 2018.
\145\ The Department assumes that it will take each small retail
BD 22.5 minutes, each large retail BD 45 minutes, each small
nonretail BD 5 hours, each large nonretail BD 10 hours, each small
IA 15 minutes, each large IA 30 minutes, each small insurer 5 hours,
and each large insurer 10 hours to meet the requirement.
\146\ Burden hours are calculated by multiplying the estimated
number of each firm type by the estimated time it will take each
firm to establish, maintain, and enforce written policies and
procedures.
\147\ The hourly cost burden is calculated as the burden hour of
each firm associated with meeting the written policies and
procedures requirement multiplied by the hourly wage of a legal
professional.
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Rollover Documentation Requirement
To meet the requirement of the rollover documentation requirement,
Financial Institutions must document the specific reasons that any
recommendation to roll over assets is in the best interest of the
Retirement Investor. The Department estimates that 1.8 million
retirement plan accounts \148\ were rolled into IRAs in accordance with
advice from a financial services professional. Due to uncertainty, the
Department discusses a range of cost estimates. For the lower-end cost
estimate, the Department estimates that the costs for documenting the
basis for investment decisions would come to $15 million per year.\149\
This is based on the assumption that most financial services
professionals already incorporate documenting the basis for rollover
recommendations in their regular business practices and another
assumption that not all rollovers are handled by financial services
professionals who act in a fiduciary capacity.\150\ For the upper-end
cost estimate, the Department assumes that all rollovers involving
financial services professionals would be affected by the proposed
exemption. Then the costs would be $59 million per year.\151\ For the
primary cost estimate, the Department assumes that 67.4 percent of
rollovers would be affected by the proposed exemption.\152\ Under this
assumption, the costs would be $40 million per year.\153\ The
Department invites comments and data regarding the number of rollovers
affected by the proposed exemption and the burden hours associated with
documenting the basis for rollover recommendations. The Department
estimates that documenting each rollover recommendation will take a
personal financial advisor 10 minutes,\154\ resulting in 203,447 \155\
burden hours and an equivalent cost burden of $39,626,306.\156\
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\148\ Cerulli has estimated the number of plans rolled into IRAs
to be 3,622,198 (see U.S. Retirement-End Investor 2019, supra note
100). The Department estimates that 50 percent of these rollovers
will be handled by a financial professional.
\149\ See supra note 117.
\150\ See supra note 118.
\151\ See supra note 119.
\152\ See supra note 120.
\153\ See supra note 121.
\154\ See supra note 122.
\155\ Burden hours are calculated by multiplying the estimated
number of rollovers affected by this proposed exemption by the
estimated hours needed to document each recommendation.
\156\ The hourly cost burden is calculated as the burden hour of
each firm associated with meeting the rollover documentation
requirement multiplied by the hourly wage of a personal financial
advisor.
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Annual Retrospective Review Requirement
Under the internal retrospective review requirement, a Financial
Institution is required to (1) conduct an annual retrospective review
reasonably designed to assist the Financial Institution in detecting
and preventing violations of, and achieving compliance with the
Impartial Conduct Standards and their policies and procedures and (2)
produce a written report that is certified by the Financial
Institution's chief executive officer.
The Department understands that, as per FINRA Rule 3110,\157\ FINRA
Rule 3120,\158\ and FINRA Rule 3130,\159\ broker dealers are already
held to a standard functionally identical to that of the retrospective
review requirements of this proposed exemption. Accordingly, in this
analysis, the Department assumes that broker dealers will incur minimal
costs to meet this requirement. In 2018, the Investment Adviser
Association estimated that 92 percent of SEC-registered IAs voluntarily
provide an annual compliance program review report to senior
management.\160\ The Department estimates that only 8 percent, or
538,\161\ of SEC-registered IAs advising retirement plans would incur
costs associated with producing a retrospective review report. Due to
lack of data, the Department assumes that state-registered IAs exhibit
similar retrospective review patterns and estimates that 8 percent, or
217,\162\ of state-registered IAs would also incur costs associated
with producing a retrospective review report.
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\157\ Rule 3110. Supervision, FINRA Manual, www.finra.org/rules-guidance/rulebooks/finra-rules/3110.
\158\ Rule 3120. Supervisory Control System, FINRA Manual,
www.finra.org/rules-guidance/rulebooks/finra-rules/3120.
\159\ Rule 3130. Annual Certification of Compliance and
Supervisory Processes, FINRA Manual, www.finra.org/rules-guidance/rulebooks/finra-rules/3130.
\160\ 2018 Investment Management Compliance Testing Survey,
Investment Adviser Association (Jun. 14, 2018), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/2018-Investment-Management_Compliance-Testing-Survey-Results-Webcast_pptx.pdf.
\161\ The SEC estimated that there were 12,940 SEC-registered
IAs that were not dually registered as BDs as of December 2018 (see
Form CRS Relationship Summary Release). The IAA Compliance 2019
Survey estimates that 52 percent of IAs have a pension consulting
business. The IAA Investment Management Compliance Testing Survey
estimates that 92 percent of SEC-registered IAs provide an annual
compliance program review report to senior management. The estimated
number of IAs affected by this exemption who do not meet the
retrospective review requirement is the product of the SEC's
estimate of SEC-registered IAs in 2018, the IAA's estimate of the
percent of IAs with a pension consulting business, and IAA's
estimate of the percent of IA's who do not provide an annual
compliance program review report.
\162\ The SEC estimated that there were 16,939 state-registered
IAs that were not dually registered as BDs as of December 2018 (see
Form CRS Relationship Summary Release). The NASAA 2019 estimates
that 16 percent of state-registered IAs have a pension consulting
business. The IAA Investment Management Compliance Testing Survey
estimates that 92 percent of SEC-registered IAs provide an annual
compliance program review report to senior management. The
Department assumes state-registered IAs exhibit similar
retrospective review patterns as SEC-registered IAs. The estimated
number of state-registered IAs affected by this exemption is the
product of the SEC's estimate of state-registered IAs in 2018,
NASAA's estimate of the percent of state-registered IAs with a
pension consulting business, and IAA's estimate of the percent of
IA's who do not provide an annual compliance program review report.
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As SEC-registered IAs are already subject to SEC Rule 206(4)-7 the
Department assumes these IAs would incur minimal costs to satisfy the
conditions related to this requirement. Insurers in many states are
already subject state insurance law based on the
[[Page 40860]]
NAIC's Model Regulation, \163\ Thus, the Department assumes that
insurers would incur negligible costs associated with producing a
retrospective review report. This is estimated to take a legal
professional 5 hours for small firms and 10 hours for large firms,
depending on the nature of the business. This results in an hour burden
of 7,032 \164\ and an equivalent cost burden of $973,297.\165\
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\163\ NAIC Suitability in Annuity Transactions Model Regulation,
Spring 2020, Section 6.C.(2)(i), available at https://www.naic.org/store/free/MDL-275.pdf. (The same requirement is found in the
previous NAIC Suitability in Annuity Transactions Model Regulation
(2010), section 6.F.(1)(f).)
\164\ Burden hours are calculated by multiplying the estimated
number of each firm type by the estimated time it will take each
firm to review the report and certify the exemption.
\165\ The hourly cost burden is calculated by multiplying the
burden hours for reviewing the report and certifying the exemption
requirement by the hourly wage of a legal professional.
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In addition to conducting the audit and producing a report,
Financial Institutions will need to review the report and certify the
exemption. This is estimated to take a financial professional 15
minutes for small firms and 30 minutes for large firms, depending on
the nature of the business. This results in an hour burden of 4,340
\166\ and an equivalent cost burden of $718,806.\167\ The Department
welcomes any comments about burden hours associated with producing an
annual review report and certifying it.
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\166\ Burden hours are calculated by multiplying the estimated
number of each firm type by the estimated time it will take each
firm to review the report and certify the exemption.
\167\ The hourly cost burden is calculated by multiplying the
burden hours for reviewing the report and certifying the exemption
requirement by the hourly wage of a financial professional.
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Overall Summary
Overall, the Department estimates that in order to meet the
conditions of this PTE, 11,782 Financial Institutions will produce 1.8
million disclosures and notices annually. These disclosures and notices
will result in 234,565 burden hours during the first year and 217,253
burden hours in subsequent years, at an equivalent cost of $43.9
million and $41.5 million respectively. The disclosures and notices in
this exemption will also result in a total cost burden for materials
and postage of $94,954 annually.
These paperwork burden estimates are summarized as follows:
Type of Review: New collection (Request for new OMB
Control Number).
Agency: Employee Benefits Security Administration,
Department of Labor.
Title: Improving Investment Advice for Workers & Retirees.
OMB Control Number: 1210-NEW.
Affected Public: Business or other for-profit institution.
Estimated Number of Respondents: 11,782.
Estimated Number of Annual Responses: 1,811,099.
Frequency of Response: Initially, Annually, and when
engaging in exempted transaction.
Estimated Total Annual Burden Hours: 234,565 during the
first year and 217,253 in subsequent years.
Estimated Total Annual Burden Cost: $94,954 during the
first year and $94,954 in subsequent years.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \168\ imposes certain
requirements on rules subject to the notice and comment requirements of
section 553(b) of the Administrative Procedure Act or any other
law.\169\ Under section 603 of the RFA, agencies must submit an initial
regulatory flexibility analysis (IRFA) of a proposal that is likely to
have a significant economic impact on a substantial number of small
entities, such as small businesses, organizations, and governmental
jurisdictions. The Department determines that this proposed exemption
will likely have a significant economic impact on a substantial number
of small entities. Therefore, the Department provides its IRFA of the
proposed exemption, below. The Department welcomes comments regarding
this assessment.
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\168\ 5 U.S.C. 601 et seq.
\169\ 5 U.S.C. 601(2), 603(a); see also 5 U.S.C. 551.
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Need for and Objectives of the Rule
As discussed earlier in this preamble, the proposed class exemption
would allow investment advice fiduciaries to receive compensation and
engage in transactions that would otherwise violate the prohibited
transaction provisions of ERISA and the Code. As such, the proposed
exemption would grant Financial Institutions and Investment
Professionals the flexibility to address different business models, and
would lessen their overall regulatory burden by coordinating
potentially overlapping regulatory requirements. The exemption
conditions, including the Impartial Conduct Standards and other
conditions supporting the standards, are expected to provide
protections to Retirement Investors. Therefore, the Department expects
the proposed exemption to benefit Retirement Investors that are small
entities and to provide efficiencies to small Financial Institutions.
Affected Small Entities
The Small Business Administration (SBA),\170\ pursuant to the Small
Business Act,\171\ defines small businesses and issues size standards
by industry. The SBA defines a small business in the Financial
Investments and Related Activities Sector as a business with up to
$41.5 million in annual receipts. Due to a lack of data and shared
jurisdictions, for purpose of performing Regulatory Flexibility
Analyses pursuant to section 601(3) of the Regulatory Flexibility Act,
the Department, after consultation with SBA's Office of Advocacy,
defines small entities included in this analysis differently from the
SBA definitions.\172\ For instance, in this analysis, the small-
business definitions for BDs and SEC-registered IAs are consistent with
the SEC's definitions, as these entities are subject to the SEC's rules
as well as the ERISA.\173\ As with SEC-registered IAs, the size of
state-registered IAs is determined based on total value of the assets
they manage.\174\ The size of insurance companies is based on annual
sales of annuities. The Department requests comments on the
appropriateness of the size standard used to evaluate the impact of the
proposed exemption on small entities.
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\170\ 13 CFR 121.201.
\171\ 15 U.S.C. 631 et seq.
\172\ The Department consulted with the Small Business
Administration Office of Advocacy in making this determination as
required by 5 U.S.C. 603(c).
\173\ 17 CFR parts 230, 240, 270, and 275, https://www.sec.gov/rules/final/33-7548.txt.
\174\ Due to lack of available data, the Department includes
state-registered IAs managing assets less than $30 million as small
entities in this analysis.
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In December 2018, there were 985 small-business BDs and 528 SEC-
registered, small-business IAs.\175\ The Department estimates that
approximately 52 percent of these small-businesses will be affected by
the proposed exemption.\176\ In December 2018, the Department estimates
there were approximately 10,840 small state-registered IAs,\177\ of
which about 1,700
[[Page 40861]]
are estimated to be affected by the proposed exemption.\178\ There were
approximately 386 insurers directly writing annuities in 2018,\179\ 316
of which the Department estimates are small entities.\180\ Table 1
summarizes the distribution of affected entities by size.
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\175\ See Form CRS Relationship Summary; Amendments to Form ADV,
84 FR 33492 (Jul. 12, 2019).
\176\ 2019 Investment Management Compliance Testing Survey,
Investment Adviser Association (Jun. 18, 2019), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/about/190618_IMCTS_slides_after_webcast_edits.pdf.
\177\ The SEC estimates there were approximately 17,000 state-
registered IAs (see Form CRS Relationship Summary; Amendments to
Form ADV, 84 FR 33492 (Jul. 12, 2019)). The Department estimates
that about 64 percent of state-registered IAs manage assets less
than $30 million, and it considers such entities small businesses.
(See 2018 Investment Adviser Section Annual Report, North American
Securities Administrators Association (May 2018), www.nasaa.org/wp-content/uploads/2018/05/2018-NASAA-IA-Report-Online.pdf.) Therefore,
the Department estimates there were about 10,840 small, state-
registered IAs.
\178\ Of the small, state-registered IAs, the Department
estimates that 16 percent provide advice or services to retirement
plans (see 2019 Investment Adviser Section Annual Report, North
American Securities Administrators Association, (May 2019)).
\179\ NAIC estimates that the number of insurers directly
writing annuities as of 2018 is 386.
\180\ LIMRA estimates in 2016, 70 insurers had more than $38.5
million in sales. (See U.S. Individual Annuity Yearbook: 2016 Data,
LIMRA Secure Retirement Institute (2017)).
Table 1--Distribution of Affected Entities by Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
BDs
SEC-registered IAs
State-registered IAs
Insurers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Small........................................... 985 26% 528 4% 10,840 64% 316 82%
Large........................................... 2,779 74% 12,412 96% 6,099 36% 70 18%
-------------------------------------------------------------------------------------------------------
Total....................................... 3,764 100% 12,940 100% 16,939 100% 386 100%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Projected Reporting, Recordkeeping, and Other Compliance Requirements
As discussed above, the proposed exemption would provide Financial
Institutions and Investment Professionals with the flexibility to
choose between the new proposed exemption or existing exemptions,
depending on their individual needs and business models. Furthermore,
the proposed exemption would provide Financial Institutions and
Investment Professionals broader, more flexible prohibited transaction
relief than is currently available, while safeguarding the interests of
Retirement Investors. In this regard, this proposed exemption could
present a less burdensome compliance alternative for some Financial
Institutions because it would allow them to streamline compliance
rather than rely on multiple exemptions with multiple sets of
conditions.
This proposed exemption simply provides an additional alternative
pathway for Financial Institutions and Investment Professionals to
receive compensation and engage in certain transactions that would
otherwise be prohibited under ERISA and the Code. Financial
Institutions would incur costs to comply with conditions set forth in
the proposed exemption. However, the Department believes the costs
associated with those conditions would be modest because the proposed
exemption was developed in consideration of other regulatory conduct
standards. The Department believes that many Financial Institutions and
Investment Professionals have already developed, or are in the process
of developing, compliance structures for similar regulatory standards.
Therefore, the Department does not believe the proposed exemption will
impose a significant compliance burden on small entities. For example,
the Department estimates that a small entity would incur, on average,
an additional $1,000 in compliance costs to meet the conditions of the
proposed exemption. These additional costs would represent 0.4 percent
of the net capital of BD with $250,000. A BD with less than $500,000 in
net capital is generally considered small, according to the SEC.
Duplicate, Overlapping, or Relevant Federal Rules
ERISA and the Code rules governing advice on the investment of
retirement assets overlap with SEC rules that govern the conduct of IAs
and BDs who advise retail investors. The Department considered conduct
standards set by other regulators, such as SEC, state insurance
regulators, and FINRA, in developing the proposed exemption, with the
goal of avoiding overlapping or duplicative requirements. To the extent
the requirements overlap, compliance with the other disclosure or
recordkeeping requirements can be used to satisfy the exemption,
provided the conditions are satisfied. This would lead to overall
regulatory efficiency.
Significant Alternatives Considered
The RFA directs the Department to consider significant alternatives
that would accomplish the stated objective, while minimizing any
significant adverse impact on small entities.
External Audit
Under section II(d) of the proposed exemption, Financial
Institutions would be required to conduct an annual retrospective
review that is reasonably designed to detect and prevent violations of,
and achieve compliance with, the Impartial Conduct Standards and the
institution's own policies and procedures. The Department considered
the alternative of requiring a Financial Institution to engage an
independent party to provide an external audit. The Department elected
not to propose this requirement to avoid the increased costs this
approach would impose. Smaller Financial Institutions may have been
disproportionately impacted by such costs, which would have been
contrary to the Department's goals of promoting access to investment
advice for Retirement Investors. Further, the Department is not
convinced that an independent, external audit would yield useful
information commensurate with the cost, particularly to small entities.
Instead, the proposal requires that Financial Institutions to document
their retrospective review, and provide it, and supporting information,
to the Department and other regulators within 10 business days of such
request.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 \181\ requires
each federal agency to prepare a written statement assessing the
effects of any federal mandate in a proposed or final rule that may
result in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any 1 year by state, local, and
tribal governments, in the aggregate, or by the private sector. For
purposes of the Unfunded Mandates Reform Act, as well as Executive
Order 12875, this proposed exemption does not include any Federal
mandate that will result in such expenditures.
---------------------------------------------------------------------------
\181\ Public Law 104-4, 109 Stat. 48 (1995).
---------------------------------------------------------------------------
Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism. It also requires federal agencies to adhere to specific
criteria in formulating and implementing policies that have
``substantial direct effects'' on the states,
[[Page 40862]]
the relationship between the national government and states, or on the
distribution of power and responsibilities among the various levels of
government. Federal agencies promulgating regulations that have these
federalism implications must consult with state and local officials,
and describe the extent of their consultation and the nature of the
concerns of state and local officials in the preamble to the final
regulation. The Department does not believe this proposed class
exemption has federalism implications because it has no substantial
direct effect on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government.
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 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
act prudently and discharge his or her duties respecting the Plan
solely in the interests of the participants and beneficiaries of the
Plan. Additionally, the fact that a transaction is the subject of an
exemption does not affect the requirement of Code section 401(a) that
the Plan must operate for the exclusive benefit of the employees of the
employer maintaining the Plan and their beneficiaries;
(2) Before the proposed exemption may be granted under ERISA
section 408(a) and Code section 4975(c)(2), the Department must find
that it is 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 the Plan and IRA
owners;
(3) If granted, the proposed exemption is applicable to a
particular transaction only if the transaction satisfies the conditions
specified in the exemption; and
(4) The proposed exemption, if granted, is 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.
Improving Investment Advice for Workers & Retirees
Section I--Transactions
(a) In general. ERISA and the Internal Revenue Code prohibit
fiduciaries, as defined, that provide investment advice to Plans and
individual retirement accounts (IRAs) from receiving compensation that
varies based on their investment advice and compensation that is paid
from third parties. ERISA and the Code also prohibit fiduciaries from
engaging in purchases and sales with Plans or IRAs on behalf of their
own accounts (principal transactions). This exemption permits Financial
Institutions and Investment Professionals who provide fiduciary
investment advice to Retirement Investors to receive otherwise
prohibited compensation and engage in riskless principal transactions
and certain other principal transactions (Covered Principal
Transactions) as described below. The exemption provides relief from
the prohibitions of ERISA section 406(a)(1)(A), (D), and 406(b), and
the sanctions imposed by Code section 4975(a) and (b), by reason of
Code section 4975(c)(1)(A), (D), (E), and (F), if the Financial
Institutions and Investment Professionals provide fiduciary investment
advice in accordance with the conditions set forth in Section II and
are eligible pursuant to Section III, subject to the definitional terms
and recordkeeping requirements in Sections IV and V.
(b) Covered transactions. This exemption permits Financial
Institutions and Investment Professionals, and their affiliates and
related entities, to engage in the following transactions, including as
part of a rollover from a Plan to an IRA as defined in Code section
4975(e)(1)(B) or (C), as a result of the provision of investment advice
within the meaning of ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B):
(1) The receipt of reasonable compensation; and
(2) The purchase or sale of an asset in a riskless principal
transaction or a Covered Principal Transaction, and the receipt of a
mark-up, mark-down, or other payment.
(c) Exclusions. This exemption does not apply if:
(1) The Plan is covered by Title I of ERISA and the Investment
Professional, Financial Institution or any affiliate is (A) the
employer of employees covered by the Plan, or (B) a named fiduciary or
plan administrator with respect to the Plan that was selected to
provide advice to the Plan by a fiduciary who is not independent of the
Financial Institution, Investment Professional, and their affiliates;
or
(2) The transaction is a result of investment advice generated
solely by an interactive website in which computer software-based
models or applications provide investment advice based on personal
information each investor supplies through the website, without any
personal interaction or advice with an Investment Professional (i.e.,
robo-advice);
(3) The transaction involves the Investment Professional acting in
a fiduciary capacity other than as an investment advice fiduciary
within the meaning of the regulations at 29 CFR 2510.3-21(c)(1)(i) and
(ii)(B) or 26 CFR 54.4975-9(c)(1)(i) and (ii)(B) setting forth the test
for fiduciary investment advice.
Section II--Investment Advice Arrangement
Section II requires Investment Professionals and Financial
Institutions to comply with Impartial Conduct Standards, including a
best interest standard, when providing fiduciary investment advice to
Retirement Investors. In addition, the exemption requires Financial
Institutions to acknowledge fiduciary status under ERISA and/or the
Code, and describe in writing the services they will provide and their
material Conflicts of Interest. Finally, Financial Institutions must
adopt policies and procedures prudently designed to ensure compliance
with the Impartial Conduct Standards when providing fiduciary
investment advice to Retirement Investors and conduct a retrospective
review of compliance.
(a) Impartial Conduct Standards. The Financial Institution and
Investment Professional comply with the following ``Impartial Conduct
Standards'':
(1) Investment advice is, at the time it is provided, in the Best
Interest of the Retirement Investor. As defined in Section V(a), such
advice 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 Retirement Investor, and does not place
[[Page 40863]]
the financial or other interests of the Investment Professional,
Financial Institution or any affiliate, related entity, or other party
ahead of the interests of the Retirement Investor, or subordinate the
Retirement Investor's interests to their own;
(2)(A) The compensation received, directly or indirectly, by the
Financial Institution, Investment Professional, their affiliates and
related entities for their services does not exceed reasonable
compensation within the meaning of ERISA section 408(b)(2) and Code
section 4975(d)(2); and (B) as required by the federal securities laws,
the Financial Institution and Investment Professional seek to obtain
the best execution of the investment transaction reasonably available
under the circumstances; and
(3) The Financial Institutions' and its Investment Professionals'
statements to the Retirement Investor about the recommended transaction
and other relevant matters are not, at the time statements are made,
materially misleading.
(b) Disclosure. Prior to engaging in a transaction pursuant to this
exemption, the Financial Institution provides the following disclosure
to the Retirement Investor:
(1) A written acknowledgment that the Financial Institution and its
Investment Professionals are fiduciaries under ERISA and the Code, as
applicable, with respect to any fiduciary investment advice provided by
the Financial Institution or Investment Professional to the Retirement
Investor; and
(2) A written description of the services to be provided and the
Financial Institution's and Investment Professional's material
Conflicts of Interest that is accurate and not misleading in all
material respects.
(c) Policies and Procedures.
(1) The Financial Institution establishes, maintains and enforces
written policies and procedures prudently designed to ensure that the
Financial Institution and its Investment Professionals comply with the
Impartial Conduct Standards in connection with covered fiduciary advice
and transactions.
(2) Financial Institutions' policies and procedures mitigate
Conflicts of Interest to the extent that the policies and procedures,
and the Financial Institution's incentive practices, when viewed as a
whole, are prudently designed to avoid misalignment of the interests of
the Financial Institution and Investment Professionals and the
interests of Retirement Investors in connection with covered fiduciary
advice and transactions.
(3) The Financial Institution documents the specific reasons that
any recommendation to roll over assets from a Plan to another Plan or
IRA as defined in Code section 4975(e)(1)(B) or (C), from an IRA as
defined in Code section 4975(e)(1)(B) or (C) to a Plan, from an IRA to
another IRA, or from one type of account to another (e.g., from a
commission-based account to a fee-based account) is in the Best
Interest of the Retirement Investor.
(d) Retrospective Review.
(1) The Financial Institution conducts a retrospective review, at
least annually, that is reasonably designed to assist the Financial
Institution in detecting and preventing violations of, and achieving
compliance with, the Impartial Conduct Standards and the policies and
procedures governing compliance with the exemption.
(2) The methodology and results of the retrospective review are
reduced to a written report that is provided to the Financial
Institution's chief executive officer (or equivalent officer) and chief
compliance officer (or equivalent officer).
(3) The Financial Institution's chief executive officer (or
equivalent officer) certifies, annually, that:
(A) The officer has reviewed the report of the retrospective
review;
(B) The Financial Institution has in place policies and procedures
prudently designed to achieve compliance with the conditions of this
exemption; and
(C) The Financial Institution has in place a prudent process to
modify such policies and procedures as business, regulatory and
legislative changes and events dictate, and to test the effectiveness
of such policies and procedures on a periodic basis, the timing and
extent of which is reasonably designed to ensure continuing compliance
with the conditions of this exemption.
(4) The review, report and certification are completed no later
than six months following the end of the period covered by the review.
(5) The Financial Institution retains the report, certification,
and supporting data for a period of six years and makes the report,
certification, and supporting data available to the Department, within
10 business days of request.
Section III--Eligibility
(a) General. Subject to the timing and scope provisions set forth
in subsection (b), an Investment Professional or Financial Institution
will be ineligible to rely on the exemption for 10 years following:
(1) A conviction of any crime described in ERISA section 411
arising out of such person's provision of investment advice to
Retirement Investors, unless, in the case of a Financial Institution,
the Department grants a petition pursuant to subsection (c)(1) below
that the Financial Institution's continued reliance on the exemption
would not be contrary to the purposes of the exemption; or
(2) Receipt of a written ineligibility notice issued by the Office
of Exemption Determinations for (A) engaging in a systematic pattern or
practice of violating the conditions of this exemption in connection
with otherwise non-exempt prohibited transactions; (B) intentionally
violating the conditions of this exemption in connection with otherwise
non-exempt prohibited transactions; or (C) providing materially
misleading information to the Department in connection with the
Financial Institution's conduct under the exemption; in each case, as
determined by the Director of the Office of Exemption Determinations
pursuant to the process described in subsection (c).
(b) Timing and Scope of Ineligibility.
(1) An Investment Professional shall become ineligible immediately
upon (A) the date of the trial court's conviction of the Investment
Professional of a crime described in subsection (a)(1), regardless of
whether that judgment remains under appeal, or (B) the date of the
Office of Exemption Determinations' written ineligibility notice
described in subsection (a)(2), issued to the Investment Professional.
(2) A Financial Institution shall become ineligible following (A)
the 10th business day after the conviction of the Financial Institution
or another Financial Institution in the same Control Group of a crime
described in subsection (a)(1) regardless of whether that judgment
remains under appeal, or, if the Financial Institution timely submits a
petition described in subsection (c)(1) during that period, upon the
date of the Office of Exemption Determination's written denial of the
petition, or (B) the Office of Exemption Determinations' written
ineligibility notice, described in subsection (a)(2), issued to the
Financial Institution or another Financial Institution in the same
Control Group.
(3) Control Group. A Financial Institution is in a Control Group
with another Financial Institution if, directly or indirectly, the
Financial Institution owns at least 80 percent of, is at least 80
percent owned by, or shares an 80 percent or more owner with, the other
Financial Institution. For purposes of
[[Page 40864]]
this provision, if the Financial Institutions are not corporations,
ownership is defined to include interests in the Financial Institution
such as profits interest or capital interests.
(4) Winding Down Period. Any Financial Institution that is
ineligible will have a one-year winding down period during which relief
is available under the exemption subject to the conditions of the
exemption other than eligibility. After the one-year period expires,
the Financial Institution may not rely on the relief provided in this
exemption for any additional transactions.
(c) Opportunity to be heard.
(1) Petitions under subsection (a)(1).
(A) A Financial Institution that has been convicted of a crime may
submit a petition to the Department informing the Department of the
conviction and seeking a determination that the Financial Institution's
continued reliance on the exemption would not be contrary to the
purposes of the exemption. Petitions must be submitted, within 10
business days after the date of the conviction, to the Director of the
Office of Exemption Determinations by email at [email protected], or by
certified mail at Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor, 200 Constitution
Avenue NW, Suite 400, Washington, DC 20210.
(B) Following receipt of the petition, the Department will provide
the Financial Institution with the opportunity to be heard, in person
or in writing or both. The opportunity to be heard in person will be
limited to one in-person conference unless the Department determines in
its sole discretion to allow additional conferences.
(C) The Department's determination as to whether to grant the
petition will be based solely on its discretion. In determining whether
to grant the petition, the Department will consider the gravity of the
offense; the relationship between the conduct underlying the conviction
and the Financial Institution's system and practices in its retirement
investment business as a whole; the degree to which the underlying
conduct concerned individual misconduct, or, alternately, corporate
managers or policy; how recent was the underlying lawsuit; remedial
measures taken by the Financial Institution upon learning of the
underlying conduct; and such other factors as the Department determines
in its discretion are reasonable in light of the nature and purposes of
the exemption. The Department will provide a written determination to
the Financial Institution that articulates the basis for the
determination.
(2) Written ineligibility notice under subsection (a)(2). Prior to
issuing a written ineligibility notice, the Director of the Office of
Exemption Determinations will issue a written warning to the Investment
Professional or Financial Institution, as applicable, identifying
specific conduct implicating subsection (a)(2), and providing a six-
month opportunity to cure. At the end of the six-month period, if the
Department determines that the conduct persists, it will provide the
Investment Professional or Financial Institution with the opportunity
to be heard, in person or in writing or both, before the Director of
the Office of Exemption Determinations issues the written ineligibility
notice. The opportunity to be heard in person will be limited to one
in-person conference unless the Department determines in its sole
discretion to allow additional conferences. The written ineligibility
notice will articulate the basis for the determination that the
Investment Professional or Financial Institution engaged in conduct
described in subsection (a)(2).
(d) A Financial Institution or Investment Professional that is
ineligible to rely on this exemption may rely on a statutory prohibited
transaction exemption if one is available or seek an individual
prohibited transaction exemption from the Department. To the extent an
applicant seeks retroactive relief in connection with an exemption
application, the Department will consider the application in accordance
with its retroactive exemption policy as set forth in 29 CFR
2570.35(d). The Department may require additional prospective
compliance conditions as a condition of retroactive relief.
Section IV--Recordkeeping
(a) The Financial Institution maintains for a period of six years
records demonstrating compliance with this exemption and makes such
records available, to the extent permitted by law including 12 U.S.C.
484, to the following persons or their authorized representatives:
(1) Any authorized employee of the Department;
(2) Any fiduciary of a Plan that engaged in an investment
transaction pursuant to this exemption;
(3) Any contributing employer and any employee organization whose
members are covered by a Plan that engaged in an investment transaction
pursuant to this exemption; or
(4) Any participant or beneficiary of a Plan, or IRA owner that
engaged in an investment transaction pursuant to this exemption.
(b)(1) None of the persons described in subsection (a)(2)-(4) above
are authorized to examine records regarding a recommended transaction
involving another Retirement Investor, privileged trade secrets or
privileged commercial or financial information of the Financial
Institution, or information identifying other individuals.
(2) Should the Financial Institution refuse to disclose information
to Retirement Investors on the basis that the information is exempt
from disclosure, the Financial Institution must, by the close of the
thirtieth (30th) day following the request, provide a written notice
advising the requestor of the reasons for the refusal and that the
Department may request such information.
Section V--Definitions
(a) Advice is in a Retirement Investor's ``Best Interest'' if such
advice 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 Retirement Investor, and does not place the financial or
other interests of the Investment Professional, Financial Institution
or any affiliate, related entity, or other party ahead of the interests
of the Retirement Investor, or subordinate the Retirement Investor's
interests to their own.
(b) A ``Conflict of Interest'' is an interest that might incline a
Financial Institution or Investment Professional--consciously or
unconsciously--to make a recommendation that is not in the Best
Interest of the Retirement Investor.
(c) A ``Covered Principal Transaction'' is a principal transaction
that:
(1) For sales to a Plan or IRA:
(A) Involves a U.S. dollar denominated debt security issued by a
U.S. corporation and offered pursuant to a registration statement under
the Securities Act of 1933; a U.S. Treasury Security; a debt security
issued or guaranteed by a U.S. federal government agency other than the
U.S. Department of Treasury; a debt security issued or guaranteed by a
government-sponsored enterprise; a municipal security; a certificate of
deposit; an interest in a Unit Investment Trust; or any
[[Page 40865]]
investment permitted to be sold by an investment advice fiduciary to a
Retirement Investor under an individual exemption granted by the
Department after the effective date of this exemption that includes the
same conditions as this exemption, and
(B) If the recommended investment is a debt security, the security
is recommended pursuant to written policies and procedures adopted by
the Financial Institution that are reasonably designed to ensure that
the security, at the time of the recommendation, has no greater than
moderate credit risk and sufficient liquidity that it could be sold at
or near carrying value within a reasonably short period of time; and
(2) For purchases from a Plan or IRA, involves any securities or
investment property.
(d) ``Financial Institution'' means an entity that is not
disqualified or barred from making investment recommendations by any
insurance, banking, or securities law or regulatory authority
(including any self-regulatory organization), that employs the
Investment Professional or otherwise retains such individual as an
independent contractor, agent or registered representative, and that
is:
(1) Registered as an investment adviser under the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or under the laws of the
state in which the adviser maintains its principal office and place of
business;
(2) A bank or similar financial institution supervised by the
United States or a state, or a savings association (as defined in
section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1813(b)(1));
(3) An insurance company qualified to do business under the laws of
a state, that: (A) Has obtained a Certificate of Authority from the
insurance commissioner of its domiciliary state which has neither been
revoked nor suspended; (B) has undergone and shall continue to undergo
an examination by an independent certified public accountant for its
last completed taxable year or has undergone a financial examination
(within the meaning of the law of its domiciliary state) by the state's
insurance commissioner within the preceding 5 years, and (C) is
domiciled in a state whose law requires that an actuarial review of
reserves be conducted annually and reported to the appropriate
regulatory authority;
(4) A broker or dealer registered under the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.); or
(5) An entity that is described in the definition of Financial
Institution in an individual exemption granted by the Department after
the date of this exemption that provides relief for the receipt of
compensation in connection with investment advice provided by an
investment advice fiduciary under the same conditions as this class
exemption.
(e) ``Individual Retirement Account'' or ``IRA'' means any account
or annuity described in Code section 4975(e)(1)(B) through (F).
(f) ``Investment Professional'' means an individual who:
(1) Is a fiduciary of a Plan or IRA by reason of the provision of
investment advice described in ERISA section 3(21)(A)(ii) or Code
section 4975(e)(3)(B), or both, and the applicable regulations, with
respect to the assets of the Plan or IRA involved in the recommended
transaction;
(2) Is an employee, independent contractor, agent, or
representative of a Financial Institution; and
(3) Satisfies the federal and state regulatory and licensing
requirements of insurance, banking, and securities laws (including
self-regulatory organizations) with respect to the covered transaction,
as applicable, and is not disqualified or barred from making investment
recommendations by any insurance, banking, or securities law or
regulatory authority (including any self-regulatory organization).
(g) ``Plan'' means any employee benefit plan described in ERISA
section 3(3) and any plan described in Code section 4975(e)(1)(A).
(h) ``Retirement Investor'' means--
(1) A participant or beneficiary of a Plan with authority to direct
the investment of assets in his or her account or to take a
distribution;
(2) The beneficial owner of an IRA acting on behalf of the IRA; or
(3) A fiduciary of a Plan or IRA.
Jeanne Klinefelter Wilson,
Acting Assistant Secretary, Employee Benefits Security Administration,
U.S. Department of Labor.
[FR Doc. 2020-14261 Filed 7-2-20; 8:45 am]
BILLING CODE 4510-29-P
