To the surprise of many stakeholders, the Department of Labor under the Biden administration let a Trump-era investment-advice exemption take effect in February, but the debate on the issue is far from over as focus turns to the department's next move.
The new administration allowed a 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, to go into effect on Feb. 16 as scheduled.
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.
During a 30-day comment period and at a subsequent hearing on the proposed exemption in September, a variety of stakeholders criticized the proposal, including participant groups like the AARP and the Consumer Federation of America, which broadly said that the exemption does not sufficiently protect investors.
"I thought because of that DOL would delay the exemption so that they would get input and comments as to whether to let it go into effect," said Kent Mason, a partner with law firm Davis & Harman LLP in Washington who testified at a Labor Department hearing in September on the proposed exemption on behalf of brokerage firm, mutual fund, insurance company and asset manager clients.
But while the Biden administration allowed the exemption to take effect, it signaled that it would soon have more to say on the issue.
"We recognize that investment-advice providers have been preparing for the exemption, and this step will allow them to implement important system changes," said Ali Khawar, deputy assistant secretary of labor for the Employee Benefits Security Administration, in a statement shortly before the exemption took effect. "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 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 — like registered investment advisers, broker-dealers, banks and insurance companies — 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.
"There's a lot in flux right now, but ultimately what the exemption provides is broad relief and a lot of flexibility in terms of how you structure your business," said Jennifer Eller, a Washington-based partner at Groom Law Group. "The conditions are definitely something to contend with, they're meaty, there's real work to comply with the conditions so it's not going to be great for everyone."