Prohibited Transactions Tag Archives

Department of Labor Extends PTE 2020-02 Temporary Enforcement Policy

November 4, 2021 | Steve Parker

As anticipated, on October 25, 2021, the Department of Labor extended its previously adopted policy regarding delayed enforcement of Prohibited Transaction Exemption 2020-02 (“PTE 2020-02). This policy extension extended the deadline for enforcement of PTE 2020-02, allowing investment advisers who are investment advice fiduciaries additional time to comply with the exemption.

Sometimes referred to as “Fiduciary Rule 3.0,” PTE 2020-02 provides exemptions from the prohibited transaction rules for investment advice fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs). PTE 2020-02 allows an investment advice fiduciary to advise an ERISA Plan or an IRA and receive variable compensation. In this context, “variable compensation” means compensation that varies based on the advice provided, such as a commission. For example, even though an investment adviser will receive “additional fees” by recommending that a client or potential client roll over 401(K) assets into an IRA to be managed by the adviser as a fiduciary, such a recommendation will not be deemed a prohibited transaction if the requirements of PTE 2020-02 are met. In order to take advantage of PTE 2020-02, however, the adviser must meet several conditions, which we outlined in a blog post earlier this year.

In 2018, the DOL issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy that explained the DOL would not pursue prohibited transaction claims, nor conclude that persons are violating the prohibited transaction rules if an investment advice fiduciary can demonstrate it worked in good faith and reasonable diligence to comply with “Impartial Conduct Standards” for transactions that would have been exempted under the previously vacated 2016 rule. Those impartial conduct standards include providing investment advice in the client’s best interest, receiving only reasonable compensation, and avoiding any materially misleading statements. FAB 2018-02 was set to expire on December 20, 2021.

Future of New DOL Fiduciary Rule Uncertain

January 29, 2021 | Steve Parker

Last month, the U.S. Department of Labor announced that it has finalized the new “fiduciary rule” proposed during the Trump administration, creating a new exemption to the fiduciary standards that investment advisers must comply with when servicing ERISA accounts and IRAs Specifically, the new rule – Prohibited Transaction Exemption 2002-02 – creates an exception to ERISA’s prohibited transaction rules and similar rules under the Internal Revenue Code. The DOL issued a Fact Sheet summarizing the rule and its impact.

The new exemption grants investment advisers more latitude and in dealing with such accounts. The exemption applies to both SEC and state-registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that serve as investment advice fiduciaries. The exemption is slated to become effective February 16, 2021. Some have speculated, however, that the new Biden administration may withdraw the rule and pursue a more restrictive one similar to the 2016 exemption adopted during the Obama administration.

After the US Court of Appeals for the Fifth Circuit struck down the Obama-era fiduciary rule in 2018, the DOL issued a Field Assistance Bulletin (FAB 2018-02), that was a temporary policy that provided relief under the prohibited transaction rules to investment advice fiduciaries, provided they worked in good faith the follow the “impartial conduct standards” that had been codified in the vacated rule. The impartial conduct standards require that an adviser act in the client’s best interest, receive only reasonable compensation and refrain from misleading clients. The new final rules, designed to supersede FAB 2018-02, were proposed in June 2020. FAB 2018-02 will remain in effect for 365 days following the publication of the new rule in the Federal Register, while the exemption will become effective 60 days after publication. Continue reading ›

DOL Reinstates Investment Adviser Fiduciary Definition and Proposes New Rules

July 17, 2020 | Steve Parker

In late June, the U.S. Department of Labor reinstated the previous definition of “fiduciary investment advice” that was contained in its prohibited transactions rules prior to 2017. That definition was amended by the “Fiduciary Rule” that went into effect in 2017, but the new rule was ultimately struck down by the Fifth Circuit Court of Appeals. Because the DOL interprets the Fifth Circuit’s decision to have reinstated the original rule, it dispensed with the normal comment period and made the new rule effective immediately.

The original (now reinstated) definition was passed in 1975 and was applied consistently by the DOL and IRS until the 2017 Fiduciary Rule became effective, albeit temporarily. The reinstated definition, being much narrower than the definition under the Fiduciary Rule, means that many fewer situations between plans and investment advisers will constitute “fiduciary investment advice” compared to the 2017 Fiduciary Rule and, consequently, the risk of engaging in a prohibited transaction is smaller.