DOL Proposes Exemption for Providing Investment Advice to Participants

Employee Benefits Alert

Client Alert

Author(s) ,

The Department of Labor (DOL) has issued a notice of a proposed class exemption from certain prohibited transaction restrictions under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) relating to the provision of investment advice to participants in retirement plans and individual retirement accounts and annuities (IRAs). The proposal accompanies a technical amendment to conform DOL regulations to a 2018 Court of Appeals' decision that vacated the DOL’s 2016 fiduciary rule and an update to the DOL’s website to reflect changes to prior prohibited transaction exemptions.


ERISA and the IRC generally prohibit fiduciaries that provide investment advice to plans and IRAs from receiving compensation that varies based on their investment advice and compensation from third parties. They also prohibit fiduciaries from engaging in transactions with plans or IRAs for their own account, which are referred to as “principal transactions.”

A fiduciary includes a person who renders “investment advice” for a fee or other compensation, direct or indirect, with respect to any moneys or other property of a plan or IRA, or who has any authority or responsibility to do so. In 1975, the DOL issued a regulation stating that persons will be considered investment advice fiduciaries if they:

(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 advice will be individualized based on the particular needs of the plan or IRA.

In 2016, the DOL finalized a new regulation that replaced the 1975 regulation and granted new associated prohibited transaction exemptions. In 2018, the regulation was vacated by the U.S. Court of Appeals for the Fifth Circuit, which prompted the DOL to issue Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy providing prohibited transaction relief to investment advice fiduciaries. In the FAB, the DOL 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.

Proposed Exemption

According to the DOL, the proposed exemption provides relief that is broader and more flexible than existing prohibited transaction exemptions for investment advice fiduciaries. While prior exemptions were focused on discrete transactions, the proposed exemption utilizes a “principles-based approach,” which is essentially an expansion of the Impartial Conduct Standards. The proposal also sets forth the DOL’s interpretation of the five-part investment advice fiduciary test and its view on when advice on the rollover of plan assets to an IRA could be considered fiduciary investment advice.

Who qualifies for the proposed exemption?

The proposed exemption is available to registered investment advisers, broker-dealers, banks, and insurance companies (“financial institutions”) and their individual employees, agents, and representatives (“investment professionals”) who provide investment advice to plan participants and beneficiaries, IRA owners, and plan and IRA fiduciaries (“retirement investors”). Investment professionals and financial institutions are generally ineligible for 10 years following a conviction of certain crimes arising out of the provision of investment advice or receipt of a written notice of ineligibility from the Office of Exemption Determinations.

What transactions may be exempt?

Under the exemption, financial institutions and investment professionals may:

  • Receive a wide variety of compensation from retirement investments that would otherwise violate the prohibited transaction rules, including commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties;
  • Receive compensation for investment advice provided to retirement investors to roll over assets from a plan to an IRA;
  • Receive compensation as a result of investment advice as to persons the retirement investor may hire to serve as an investment advice provider or asset manager; and
  • Engage in principal transactions with plans and IRAs in which the financial institution purchases or sells certain investments from its own account.

What conditions must be satisfied for the exemption to apply?

The investment professional or financial institution must:

  • Provide the advice in accordance with the Impartial Conduct Standards, which require the investment professional or financial institution to (1) provide advice that is in the retirement investors’ best interest, (2) charge only reasonable compensation, (3) make no material misleading statements, and (4) seek to obtain the best execution of the investment transaction reasonably available under the circumstances, as required by the federal securities laws;
  • Acknowledge in writing their and the investment professionals’ fiduciary status under ERISA and the IRC, as applicable, when providing investment advice to the retirement investors, describe in writing the services to be provided, and describe in writing any material conflicts of interest;
  • Adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards; and
  • Conduct a retrospective review of compliance with the Impartial Conduct Standards.

Investment professionals or financial institutions providing advice to retirement investors to roll over assets from a plan to an IRA must document the reasons that the advice to roll over was in the retirement investor’s best interest. Further limitations and conditions also apply when an investment professional or financial institution engages in a principal transaction, depending on the financial instrument that is the subject of the transaction. In addition, financial institutions are subject to certain recordkeeping requirements.

Is advice regarding rollovers investment advice?

The DOL had previously indicated that providing advice to roll assets out of a plan did not generally constitute investment advice for purposes of making the financial institution or investment professional a fiduciary. The DOL’s view was that a recommendation to take a distribution is not advice concerning a particular investment, and any recommendation regarding the investment of the distribution proceeds would be advice with respect to funds that are no longer assets of the plan. The DOL now considers this conclusion to be incorrect and states that the “better view” is that advice to take a distribution of assets from a plan is actually advice to sell, withdraw, or transfer investment assets currently held in the plan. The DOL pointed out that all prongs of the five-part test described above must still be satisfied for the investment advice provider to be a fiduciary.

What transactions are excluded from the exemption?

The following transactions are specifically excluded from the proposed exemption:

  • 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;
  • Transactions that are 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); and
  • Transactions in which the investment professional is acting in a fiduciary capacity other than as an investment advice fiduciary.

The DOL has requested comments on all aspects of the proposed exemption and the DOL’s related interpretations of law. Comments are due within 30 days of the publication of the proposed exemption in the Federal Register. In the meantime, the DOL has stated that the temporary enforcement policy announced in FAB 2018-02 remains in plan.

If you have any questions about the proposed exemption, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.