Biden Administration Permits Trump-Era Investment Advice Exemption, Rollover Guidance, to Come Into Effect

The Department of Labor issued a press release on February 12 confirming that Prohibited Transaction Exemption 2020-02, titled “Improving Investment Advice for Workers & Retirees” (the “Exemption”), would go into effect as scheduled. The Exemption was finalized and published by the Trump administration in December 2020, and came into effect on February 16.

The newly available Exemption is intended to fill a void left by the loss of the “Best Interest Contract” or “BIC” Exemption, which was struck down along with the rest of the Obama-era Fiduciary Rule in a March 2018 Fifth Circuit ruling.

Like the BIC Exemption, the new Exemption permits investment advice fiduciaries to receive commissions and other forms of variable compensation from investments and insurance products recommended to plans and IRAs (as well as to engage in certain principal transactions), which would otherwise run afoul of the prohibited transaction provisions under ERISA and the Internal Revenue Code.

Also like the BIC Exemption, the new Exemption requires advice fiduciaries to act in the best interest of retirement investors and satisfy certain other “impartial conduct” standards, along with a number of other requirements.  And, it applies only with respect to non-discretionary advice, not discretionary investment management of plan or IRA assets.

Along with the Exemption itself, as part of its rulemaking the DOL also significantly broadened its interpretation of when recommendations to roll plan benefits over to IRAs constitute fiduciary investment advice.  This is a significant issue because, since rollover recommendations typically influence the compensation that advisors receive for their services, to the extent they constitute fiduciary advice the new Exemption (or an existing prohibited transaction exemption, if available) would need to be satisfied.

With the change of administration, the decision to allow the Exemption to go into effect was met with some surprise.  However, while it has now taken effect, the DOL also announced that the enforcement relief issued in Field Assistance Bulletin 2018-02 will remain in place until December 20, 2021.  Issued shortly following the Fifth Circuit ruling that struck down the Obama-era guidance, the Bulletin provided that the DOL and IRS would refrain from pursuing prohibited transaction claims against advice fiduciaries who were working in good faith to satisfy the “best interest” and other impartial conduct standards under the BIC Exemption.  The extension of this relief will provide the financial services industry with a transition period to come into compliance with the new Exemption, including to update their practices on rollovers as needed.