PTE 2020-02 for Investment Advice Fiduciaries: Overview and Checklist |

Overview: In general, the prohibited transaction rules (in ERISA and the Tax Code) (1) prohibit fiduciaries that provide investment advice to plans subject to Title I of ERISA (including 401(k) plans, pension plans and profit-sharing plans) (“ERISA Plans”) and IRAs (collectively, “Plans”) from receiving compensation that is paid from third parties or that varies based on the fiduciaries’ advice and (2) prohibit fiduciaries from engaging in principal transactions, including purchases and sales with Plans on behalf of their own accounts. Section 408(b)(2) of ERISA provides an exemption for compensation received by a service provider to a Plan, but it does not provide relief where the service provider is a fiduciary that has any authority to require the Plan to pay an additional fee to the fiduciary (including when fiduciary investment advice is provided on a nondiscretionary basis). Similarly, Section 408(b)(17) of ERISA provides an exemption for purchases and sales for adequate consideration between a Plan and a party in interest, but does not apply where the third party is a fiduciary or provides fiduciary investment advice with respect to the assets involved in the transaction.

PTE 2020-02 allows 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 other principal transactions.” This prohibited transaction exemption is important because the Department of Labor (“DOL”) recently withdrew the so-called “Deseret Letter,” it issued in 2005, which held that advice regarding a rollover from an ERISA Plan (such as a 401(k) plan) generally would not be considered fiduciary investment advice. As a result, the DOL now takes the position that a Financial Institution may be a fiduciary when it gives advice to roll assets out of an ERISA Plan and subsequently receives a fee for management of those assets in an IRA or engage in riskless and certain other principal transactions with respect to the rollover to an IRA. This exemption may cover transactions other than rollover advice, but the exemption does not apply to Financial Institutions and Investment Professionals that give discretionary advice with respect to a transaction.

Fiduciary investment advice is defined under a five-part test under which a financial institution or investment professional: (i) renders advice to the Plan 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; (ii) on a regular basis; (iii) pursuant to a mutual agreement, arrangement, or understanding with the Plan or Plan fiduciary (including an IRA owner), that (iv) the advice will serve as a primary basis for investment decisions with respect to Plan assets, and that (v) the advice will be individualized based on the particular needs of the Plan.

In the DOL’s view, disclaimers of a mutual understanding that investment advice may be relied upon are not determinative, but may be considered in determining whether a mutual understanding exists. The DOL said that it will consider the reasonable understandings of the parties, including whether “firms and investment professionals hold themselves out in their oral communications, marketing materials, or interactions with retirement investors as making individualized recommendations that the investor can rely upon to make an investment decision that is in the best interest of the investor, and the investor, accordingly, relies upon the recommendation to make an investment decision.” Generally, a “boiler plate disclaimer would be insufficient to avoid fiduciary status. Further, first-time advice related to a rollover transaction may satisfy the “regular basis” requirement when the rollover is intended to be the beginning of a long-term relationship. The DOL…