A Department of Labor prohibited transaction exemption that permits investment-advice fiduciaries to receive compensation for more types of guidance, including advice to roll over assets from a retirement plan to an individual retirement account, will go into effect Feb. 16 as scheduled, the agency said Friday.
The exemption was finalized in December under the Trump administration but needed 60 days to take effect. Upon taking office Jan. 20, the Biden administration had the ability to halt and review any rule-making effort that was not in effect, and the exemption had an uncertain fate.
"This exemption allows for important investor protections, including a stringent 'best interest' standard of care for fiduciary recommendations of rollovers from ERISA-protected retirement accounts," said Ali Khawar, deputy assistant secretary of Labor for the Employee Benefits Security Administration, in a statement.
"We recognize that investment-advice providers have been preparing for the exemption, and this step will allow them to implement important system changes, Mr. Khawar said. "That said, we will continue our stakeholder outreach to determine how we might improve this exemption, the rule defining who is an investment-advice fiduciary, and related exemptions to build on this approach."
The Employee Retirement Income Security Act of 1974 currently prohibits investment advice fiduciaries from self-dealing, or taking actions that would provide additional compensation from transactions for themselves, their affiliates or related entities involving plans and individual retirement accounts.
Investment advice fiduciaries relying on the exemption would have to provide advice in the best interest of retirement investors and give those investors basic information about conflicts of interests, said Jeanne Klinefelter Wilson, former acting assistant secretary of labor for the EBSA under the Trump administration, on a briefing call with reporters in December.
Mr. Khawar, who is the EBSA's current acting head, said the agency in the coming days will publish related guidance for retirement investors, employee benefit plans and investment advice providers.
"We are pleased that the Department of Labor has decided to proceed with the new exemption, which contains important protections for plan participants and certainty for plan advisers who want to work with those participants." said Brian Graff, CEO of the American Retirement Association. "We look forward to the opportunity to work with the Labor Department as they develop guidance and continue to improve this exemption in the months ahead."
Upon proposing the exemption June 29, the Labor Department also issued a final rule reinstating the five-part test used to determine whether an investment professional or financial institution is a fiduciary. It was in 2016 that the Labor Department under the Obama administration finalized a rule, commonly known as the fiduciary rule, that aimed to replace the five-part test by broadening the definition on when a person or entity is taking on fiduciary responsibilities. The 2016 rule was struck down in federal court in 2018.
The Securities and Exchange Commission's own best-interest standard, known as Reg BI, went into effect in June, but the debate on investment advice and exactly who is a fiduciary is likely to continue under the Biden administration.