The Department of Labor on Tuesday finalized a prohibited transaction exemption permitting investment-advice fiduciaries to receive compensation for more types of their guidance, including advice to roll over assets from a retirement plan to an individual retirement account.
The exemption will go into effect 60 days after publication in the Federal Register and after the Biden administration takes office Jan. 20. The new administration can halt and review any rule-making effort that is not in effect, meaning that the exemption has an uncertain fate.
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, acting assistant secretary of Labor for the Employee Benefits Security Administration, on a briefing call with reporters.
The exemption would be interpreted and applied consistent with the Securities and Exchange Commission's best-interest standard, known as Reg BI, which went into effect June 30.
Upon proposing the exemption on 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.
In the exemption's preamble, the Labor Department stipulates — and Ms. Wilson reiterated Tuesday — that rollover advice is covered by the five-part test, so long as each of the five prongs are met.
The Labor Department received 106 written comments during the proposed exemption's 30-day comment period, and on Sept. 3 held a public hearing where those who commented were permitted to provide additional testimony. In both instances, stakeholders criticized the Labor Department for the rule-making's rapid pace.
In the final exemption, the Labor Department said it did not rush the proceedings and added that the general issues and concerns raised by the proposal have been subject to significant amounts of discussion between the department and the public since 2010.
