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Bates Research  |  07-30-20

DOL Proposes New Class Exemption for Investment Advisers

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More than two years after the Fifth Circuit Court of Appeals vacated the Department of Labor’s (“DOL”) fiduciary duty rule, the agency has proposed new regulations on investment advice for retirement accounts under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“the Code”). Under the heading “Improving Investment Advice for Workers & Retirees,” the DOL (i) proposed a new “prohibited transaction class exemption” for investment advice that would allow financial institutions and investment adviser fiduciaries to receive compensation that would otherwise be prohibited under ERISA law, (ii) reinstated the 1975 regulation and its five-part test for defining investment advice, and (iii) made certain changes to its pre-existing prohibited transaction class exemptions consistent with the Court Order vacating the DOL’s fiduciary duty rule. Here are some of the details of the new DOL proposal.

A New Prohibited Transaction Class Exemption

The heart of the DOL proposal is a new class exemption that would be available to registered investment advisers, broker dealers, financial institutions and insurance companies that “provide fiduciary investment advice to Retirement Investors” (e.g., Plan participants and beneficiaries, IRA owners and Plan and IRA fiduciaries[1]). If granted the exemption, these institutions and professionals could receive various types of transaction payments and fees that are currently prohibited under ERISA law, including: “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 would also apply to advice provided on Plan roll-overs in addition to allowing financial institutions to transact to or from their own accounts.

By this proposal, the DOL is shifting its approach from one focused on narrow exemptions based on specific prohibited transactions to one which is more “principles-based.” The DOL is doing this by conditioning the exemptions on compliance with their “Impartial Conduct Standards.” These standards incorporate three elements: a best interest standard, a reasonable compensation standard and “a requirement to make no misleading statements about investment transactions and other relevant matters.”

According to DOL, each of these elements—which have long histories and pertinent interpretations—will now be aligned and consistent with Reg BI and prevailing securities law. As to the best interest standard, DOL affirms that investor fiduciary advice should be (i) prudent, reflecting the care, skill and diligence under prevailing circumstances and “based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor,” and be (ii) loyal, meaning that the advice does not place the interests of the financial adviser ahead of the interests of the retirement investor. These are familiar considerations for advisers under Reg BI.

Other specific requirements to maintain eligibility under the new broad exemption include written acknowledgements of an adviser’s fiduciary status under ERISA and the Code (see below), written communications regarding the services to be provided and any material conflicts of interest, and the adoption of policies and procedures to ensure compliance with the Impartial Conduct Standards (subject to retrospective review).

The DOL cautioned that financial institutions and professionals would be ineligible or would lose their eligibility for the exemption if, within ten years prior or following, they were “convicted of certain crimes arising out of their provision of investment advice to retirement investors.” The DOL stated, however, that should they be excluded from the broad exemption, these institutions or individuals could always apply for other, more targeted exemptions. The DOL justified this approach by saying that its more focused approach would “provide significant protections for Retirement Investors while preserving wide availability of investment advice arrangements and products.”

Further, the new proposed exemption would require disclosure of the status of the adviser under ERISA and the Code and would require providing an accurate written description of their services and material conflicts of interest. The DOL made clear that the proposed exemption would not “create any new legal claims above and beyond those expressly authorized in ERISA.”

Recognition as an Investment Advice Fiduciary: The Five-Part Test

To become eligible for the new class exemption, the DOL has effectively reinstated its’ 1975 regulation which imposed a five-part test to determine the status of an advisor. (That test had been supplanted by the DOL’s previous—and subsequently vacated—fiduciary rule; by the new proposal, DOL is adding a technical amendment which would formally reinstate the rule and test.)

For an adviser to be considered an investment advice fiduciary under ERISA and the Code, he/she must be authorized or responsible for providing investment advice and receive direct or indirect compensation “with respect to any moneys or other property” of a Plan. Specifically, the test requires the professional to:

  1. provide advice on the Plan or make recommendations on “investing in, purchasing, or selling securities or other property;”
  2. act regularly;
  3. act under an arrangement “with the Plan, Plan fiduciary or IRA owner;”
  4. provide advice which serves as the primary basis for an investment decision; and
  5. Tailor the advice for the individual “based on the particular needs of the Plan or IRA.”

Facts and circumstances will determine if the test is satisfied. Consequently, for a professional to be eligible for the exemption, he/she must establish status as an investment adviser fiduciary under this test.

The DOL’s proposal includes some guidance on the application of the test, particularly pertaining to advice concerning rollovers. For example, the DOL describes instances where an isolated recommendation to take an employee plan distribution and roll it into an IRA may fail the “regular” prong of the test, however advice to do so as part of an ongoing relationship with the client may be enough for that “regular” prong to be satisfied.  

Additional Changes

As noted above, the DOL addressed pre-existing prohibited transaction class exemptions under the new proposal in order to harmonize the results with the court’s decision to vacate the fiduciary rule. Specifically, the DOL removed two exemptions: the "Best Interest Contract Exemption" and the “Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRA” exemption. Certain other prohibited transaction exemptions that were amended in 2016, including most notably a pre-existing exemption for insurance companies and insurance agents, remain in force. However, under the proposal they would revert back to their pre-amendment forms.

The DOL highlighted that the new proposed  exemption does not cover robo-advice arrangements without the interaction of an investment professional.


It is clear that the timing of the DOL proposal was not accidental. It came within days of the implementation date of the SEC’s Regulation Best Interest (“Reg BI”) and shortly after a federal appellate court denied claims by several state attorneys challenging the adoption of that Reg BI regulation. As a result, the DOL made its intention to sync with the new SEC Reg BI standards framework explicit, highlighting that “the best interest standard in the new proposed class exemption is aligned with the conduct standards in the Securities and Exchange Commission's Regulation Best Interest.” Expect many comments on how the DOL’s new rules relate to Reg BI.

The proposed prohibited transaction class exemption is broader and “more flexible” than DOL’s prior exemption regime. It is based, in large part, on the temporary enforcement policy created after the court decision to vacate the DOL fiduciary rule. (FAB 2018-02.) Compliance officers that have modified their frameworks to conform with the Impartial Conduct Standards should be ahead of the curve. But, before drawing what may appear to be straightforward conclusions, it is important to remember that we have been here many times before (and that state actions on investment adviser standards are still alive and kicking.)  Bates will keep you apprised.


[1] 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.

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.