Federal Register, Volume 81 Issue 68 (Friday, April 8, 2016)
[Federal Register Volume 81, Number 68 (Friday, April 8, 2016)]
[Rules and Regulations]
[Pages 21208-21221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07930]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application Number D-11820]
ZRIN 1210-ZA25
Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1
AGENCY: Employee Benefits Security Administration (EBSA), U.S.
Department of Labor.
ACTION: Adoption of Amendments to Class Exemptions.
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SUMMARY: This document contains amendments to prohibited transaction
exemptions (PTEs) 75-1, 77-4, 80-83 and 83-1. Generally, the Employee
Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue
Code (the Code) prohibit fiduciaries with respect to employee benefit
plans and individual retirement accounts (IRAs) from engaging in self-
dealing, including using their authority, control or responsibility to
affect or increase their own compensation. These exemptions generally
permit fiduciaries to receive compensation or other benefits as a
result of the use of their fiduciary authority, control or
responsibility in connection with investment transactions involving
plans or IRAs. The amendments require the fiduciaries to satisfy
uniform Impartial Conduct Standards in order to obtain the relief
available under each exemption. The amendments affect participants and
beneficiaries of plans, IRA owners, and fiduciaries with respect to
such plans and IRAs.
DATES: Issuance date: These amendments are issued June 7, 2016.
Applicability date: These amendments are applicable to transactions
occurring on or after April 10, 2017.
FOR FURTHER INFORMATION CONTACT: Brian Shiker, Linda Hamilton or Susan
Wilker, Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor, (202) 693-8824 (this is not a
toll-free number).
SUPPLEMENTARY INFORMATION: The Department is amending the class
exemptions on its own motion, pursuant to ERISA section 408(a) and Code
section 4975(c)(2), and in accordance with the procedures set forth in
29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)).
Executive Summary
Purpose of Regulatory Action
The Department grants these amendments to PTEs 75-1, 77-4, 80-83
and 83-1 in connection with its publication today, elsewhere in this
issue of the Federal Register, of a final regulation defining who is a
``fiduciary'' of an employee benefit plan under ERISA as a result of
giving investment advice to a plan or its participants or beneficiaries
(Regulation). The Regulation also applies to the definition of a
``fiduciary'' of a plan (including an IRA) under the Code. The
Regulation amends a prior regulation, dating to 1975, specifying when a
person is a ``fiduciary'' under ERISA and the Code by reason of the
provision of investment advice for a fee or other compensation
regarding assets of a plan or IRA. The Regulation takes into account
the advent of 401(k) plans and IRAs, the dramatic increase in
rollovers, and other developments that have transformed the retirement
plan landscape and the associated investment market over the four
decades since the existing regulation was issued. In light of the
extensive changes in retirement investment practices and relationships,
the Regulation updates existing rules to distinguish more appropriately
between the sorts of advice relationships that should be treated as
fiduciary in nature and those that should not.
In connection with the adoption of the Regulation, PTEs 75-1, Part
III, 75-1, Part IV, 77-4, 80-83 and 83-1 are amended to increase the
safeguards of the exemptions. As amended, new ``Impartial Conduct
Standards'' are made conditions of the exemptions. Fiduciaries are
required to act in accordance with these standards in transactions
permitted by the exemptions. The standards are incorporated in multiple
class exemptions, including the exemptions that are the subject of this
notice, other existing exemptions, and two new exemptions published
elsewhere in this issue of the Federal Register, to ensure that
fiduciaries relying on the exemptions are held to a uniform set of
standards and that these standards are applicable to transactions
involving both plans and IRAs. The amendments apply prospectively to
fiduciaries relying on the exemptions.
ERISA section 408(a) specifically authorizes the Secretary of Labor
to grant and amend administrative exemptions from ERISA's prohibited
transaction provisions.\1\ Regulations at 29 CFR 2570.30 to 2570.52
describe the procedures for applying for an administrative exemption.
In amending these exemptions, the Department has determined that the
amended exemptions are administratively feasible, in the interests of
plans and their participants and beneficiaries and IRA owners, and
protective of the rights of participants and beneficiaries of plans and
IRA owners.
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\1\ Code section 4975(c)(2) authorizes the Secretary of the
Treasury to grant exemptions from the parallel prohibited
transaction provisions of the Code. Reorganization Plan No. 4 of
1978 (5 U.S.C. app. at 214 (2000)) (``Reorganization Plan'')
generally transferred the authority of the Secretary of the Treasury
to grant administrative exemptions under Code section 4975 to the
Secretary of Labor. To rationalize the administration and
interpretation of dual provisions under ERISA and the Code, the
Reorganization Plan divided the interpretive and rulemaking
authority for these provisions between the Secretaries of Labor and
of the Treasury, so that, in general, the agency with responsibility
for a given provision of Title I of ERISA would also have
responsibility for the corresponding provision in the Code. Among
the sections transferred to the Department were the prohibited
transaction provisions and the definition of a fiduciary in both
Title I of ERISA and in the Code. ERISA's prohibited transaction
rules, 29 U.S.C. 1106-1108, apply to ERISA-covered plans, and the
Code's corresponding prohibited transaction rules, 26 U.S.C.
4975(c), apply both to ERISA-covered pension plans that are tax-
qualified pension plans, as well as other tax-advantaged
arrangements, such as IRAs, that are not subject to the fiduciary
responsibility and prohibited transaction rules in ERISA.
Specifically, section 102(a) of the Reorganization Plan provides the
Department of Labor with ``all authority'' for ``regulations,
rulings, opinions, and exemptions under section 4975 [of the Code]''
subject to certain exceptions not relevant here. Reorganization Plan
section 102. In President Carter's message to Congress regarding the
Reorganization Plan, he made explicitly clear that as a result of
the plan, ``Labor will have statutory authority for fiduciary
obligations. . . . Labor will be responsible for overseeing
fiduciary conduct under these provisions.'' Reorganization Plan,
Message of the President. This exemption provides relief from the
indicated prohibited transaction provisions of both ERISA and the
Code.
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Summary of the Major Provisions
This notice amends prohibited transaction exemptions 75-1, Part
III,
[[Page 21209]]
75-1, Part IV, 77-4, 80-83 and 83-1. Each amendment incorporates the
same Impartial Conduct Standards. Generally stated, the Impartial
Conduct Standards require fiduciaries to: Act in the ``best interest''
of plans and IRAs; charge no more than reasonable compensation; and
make no misleading statements to the plan or IRA, when engaging in the
transactions that are the subject of these exemptions. The amendments
require a fiduciary that satisfies ERISA section 3(21)(A)(i) or (ii),
or the corresponding provisions of Code section 4975(e)(3)(A) or (B),
with respect to the assets involved in the investment transaction, to
meet the standards with respect to the investment transactions
described in the applicable exemption.
Executive Order 12866 and 13563 Statement
Under Executive Orders 12866 and 13563, the Department must
determine whether a regulatory action is ``significant'' and therefore
subject to the requirements of the Executive Order and subject to
review by the Office of Management and Budget (OMB). Executive Orders
12866 and 13563 direct agencies to assess all costs and benefits of
available regulatory alternatives and, if regulation is necessary, to
select regulatory approaches that maximize net benefits (including
potential economic, environmental, public health and safety effects,
distributive impacts, and equity). Executive Order 13563 emphasizes the
importance of quantifying both costs and benefits, of reducing costs,
of harmonizing and streamlining rules, and of promoting flexibility. It
also requires federal agencies to develop a plan under which the
agencies will periodically review their existing significant
regulations to make the agencies' regulatory programs more effective or
less burdensome in achieving their regulatory objectives.
Under Executive Order 12866, ``significant'' regulatory actions are
subject to the requirements of the Executive Order and review by the
OMB. Section 3(f) of Executive Order 12866, defines a ``significant
regulatory action'' as an action that is likely to result in a rule (1)
having an annual effect on the economy of $100 million or more, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant'' regulatory actions); (2)
creating serious inconsistency or otherwise interfering with an action
taken or planned by another agency; (3) materially altering the
budgetary impacts of entitlement grants, user fees, or loan programs or
the rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, OMB has determined that
this action is ``significant'' within the meaning of Section 3(f)(4) of
the Executive Order. Accordingly, the Department has undertaken an
assessment of the costs and benefits of the proposal, and OMB has
reviewed this regulatory action. The Department's complete Regulatory
Impact Analysis is available at www.dol.gov/ebsa.
Background
Regulation Defining a Fiduciary
As explained more fully in the preamble to the Regulation, ERISA is
a comprehensive statute designed to protect the interests of plan
participants and beneficiaries, the integrity of employee benefit
plans, and the security of retirement, health, and other critical
benefits. The broad public interest in ERISA-covered plans is reflected
in its imposition of fiduciary responsibilities on parties engaging in
important plan activities, as well as in the tax-favored status of plan
assets and investments. One of the chief ways in which ERISA protects
employee benefit plans is by requiring that plan fiduciaries comply
with fundamental obligations rooted in the law of trusts. In
particular, plan fiduciaries must manage plan assets prudently and with
undivided loyalty to the plans and their participants and
beneficiaries.\2\ In addition, they must refrain from engaging in
``prohibited transactions,'' which ERISA does not permit because of the
dangers posed by the fiduciaries' conflicts of interest with respect to
the transactions.\3\ When fiduciaries violate ERISA's fiduciary duties
or the prohibited transaction rules, they may be held personally liable
for the breach.\4\ In addition, violations of the prohibited
transaction rules are subject to excise taxes under the Code.
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\2\ ERISA section 404(a).
\3\ ERISA section 406. ERISA also prohibits certain transactions
between a plan and a ``party in interest.''
\4\ ERISA section 409; see also ERISA section 405.
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The Code also has rules regarding fiduciary conduct with respect to
tax-favored accounts that are not generally covered by ERISA, such as
IRAs. In particular, fiduciaries of these arrangements, including IRAs,
are subject to the prohibited transaction rules, and, when they violate
the rules, to the imposition of an excise tax enforced by the Internal
Revenue Service. Unlike participants in plans covered by Title I of
ERISA, IRA owners do not have a statutory right to bring suit against
fiduciaries for violations of the prohibited transaction rules.
Under this statutory framework, the determination of who is a
``fiduciary'' is of central importance. Many of ERISA's and the Code's
protections, duties, and liabilities hinge on fiduciary status. In
relevant part, ERISA section 3(21)(A) and Code section 4975(e)(3)
provide that a person is a fiduciary with respect to a plan or IRA to
the extent he or she (1) exercises any discretionary authority or
discretionary control with respect to management of such plan or IRA,
or exercises any authority or control with respect to management or
disposition of its assets; (2) renders investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys or
other property of such plan or IRA, or has any authority or
responsibility to do so; or, (3) has any discretionary authority or
discretionary responsibility in the administration of such plan or IRA.
The statutory definition deliberately casts a wide net in assigning
fiduciary responsibility with respect to plan and IRA assets. Thus,
``any authority or control'' over plan or IRA assets is sufficient to
confer fiduciary status, and any persons who render ``investment advice
for a fee or other compensation, direct or indirect'' are fiduciaries,
regardless of whether they have direct control over the plan's or IRA's
assets and regardless of their status as an investment adviser or
broker under the federal securities laws. The statutory definition and
associated responsibilities were enacted to ensure that plans, plan
participants, and IRA owners can depend on persons who provide
investment advice for a fee to provide recommendations that are
untainted by conflicts of interest. In the absence of fiduciary status,
the providers of investment advice are neither subject to ERISA's
fundamental fiduciary standards, nor accountable under ERISA or the
Code for imprudent, disloyal, or biased advice.
In 1975, the Department issued a regulation, at 29 CFR 2510.3-21(c)
defining the circumstances under which a person is treated as providing
``investment advice'' to an employee benefit plan within the meaning of
ERISA section 3(21)(A)(ii) (the ``1975
[[Page 21210]]
regulation'').\5\ The 1975 regulation narrowed the scope of the
statutory definition of fiduciary investment advice by creating a five-
part test for fiduciary advice. Under the 1975 regulation, for advice
to constitute ``investment advice,'' an adviser must--(1) render advice
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 (2) on a regular basis (3)
pursuant to a mutual agreement, arrangement or understanding, with the
plan or a plan fiduciary that (4) the advice will serve as a primary
basis for investment decisions with respect to plan assets, and that
(5) the advice will be individualized based on the particular needs of
the plan. The 1975 regulation provided that an adviser is a fiduciary
with respect to any particular instance of advice only if he or she
meets each and every element of the five-part test with respect to the
particular advice recipient or plan at issue.
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\5\ The Department of Treasury issued a virtually identical
regulation, at 26 CFR 54.4975-9(c), which interprets Code section
4975(e)(3).
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The market for retirement advice has changed dramatically since the
Department first promulgated the 1975 regulation. Individuals, rather
than large employers and professional money managers, have become
increasingly responsible for managing retirement assets as IRAs and
participant-directed plans, such as 401(k) plans, have supplanted
defined benefit pensions. At the same time, the variety and complexity
of financial products have increased, widening the information gap
between advisers and their clients. Plan fiduciaries, plan participants
and IRA investors must often rely on experts for advice, but are unable
to assess the quality of the expert's advice or effectively guard
against the adviser's conflicts of interest. This challenge is
especially true of retail investors with smaller account balances who
typically do not have financial expertise, and can ill-afford lower
returns to their retirement savings caused by conflicts. The IRA
accounts of these investors often account for all or the lion's share
of their assets and can represent all of savings earned for a lifetime
of work. Losses and reduced returns can be devastating to the investors
who depend upon such savings for support in their old age. As baby
boomers retire, they are increasingly moving money from ERISA-covered
plans, where their employer has both the incentive and the fiduciary
duty to facilitate sound investment choices, to IRAs where both good
and bad investment choices are myriad and advice that is conflicted is
commonplace. These rollovers are expected to approach $2.4 trillion
cumulatively from 2016 through 2020.\6\ These trends were not apparent
when the Department promulgated the 1975 regulation. At that time,
401(k) plans did not yet exist and IRAs had only just been authorized.
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\6\ Cerulli Associates, ``Retirement Markets 2015.''
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As the marketplace for financial services has developed in the
years since 1975, the five-part test has now come to undermine, rather
than promote, the statutes' text and purposes. The narrowness of the
1975 regulation has allowed advisers, brokers, consultants and
valuation firms to play a central role in shaping plan and IRA
investments, without ensuring the accountability that Congress intended
for persons having such influence and responsibility. Even when plan
sponsors, participants, beneficiaries and IRA owners clearly relied on
paid advisers for impartial guidance, the 1975 regulation has allowed
many advisers to avoid fiduciary status and disregard basic fiduciary
obligations of care and prohibitions on disloyal and conflicted
transactions. As a consequence, these advisers have been able to steer
customers to investments based on their own self-interest (e.g.,
products that generate higher fees for the adviser even if there are
identical lower-fee products available), give imprudent advice, and
engage in transactions that would otherwise be prohibited by ERISA and
the Code without fear of accountability under either ERISA or the Code.
In the Department's amendments to the 1975 regulation defining
fiduciary advice within the meaning of ERISA section 3(21)(A)(ii) and
Code section 4975(e)(3)(B) (the ``Regulation'') which are also
published in this issue of the Federal Register, the Department is
replacing the existing regulation with one that more appropriately
distinguishes between the sorts of advice relationships that should be
treated as fiduciary in nature and those that should not, in light of
the legal framework and financial marketplace in which IRAs and plans
currently operate.\7\
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\7\ The Department initially proposed an amendment to its
regulation defining a fiduciary within the meaning of ERISA section
3(21)(A)(ii) and Code section 4975(e)(3)(B) on October 22, 2010, at
75 FR 65263. It subsequently announced its intention to withdraw the
proposal and propose a new rule, consistent with the President's
Executive Orders 12866 and 13563, in order to give the public a full
opportunity to evaluate and comment on the new proposal and updated
economic analysis. The first proposed amendment to the rule was
withdrawn on April 20, 2015, see 80 FR 21927.
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The Regulation describes the types of advice that constitute
``investment advice'' with respect to plan or IRA assets for purposes
of the definition of a fiduciary at ERISA section 3(21)(A)(ii) and Code
section 4975(e)(3)(B). The Regulation covers ERISA-covered plans, IRAs,
and other plans not covered by Title I of ERISA, such as Keogh plans,
and health savings accounts described in section 223(d) of the Code.
As amended, the Regulation provides that a person renders
investment advice with respect to assets of a plan or IRA if, among
other things, the person provides, directly to a plan, a plan
fiduciary, plan participant or beneficiary, IRA or IRA owner, the
following types of advice, for a fee or other compensation, whether
direct or indirect:
(i) A recommendation as to the advisability of acquiring, holding,
disposing of, or exchanging, securities or other investment property,
or a recommendation as to how securities or other investment property
should be invested after the securities or other investment property
are rolled over, transferred or distributed from the plan or IRA; and
(ii) A recommendation as to the management of securities or other
investment property, including, among other things, recommendations on
investment policies or strategies, portfolio composition, selection of
other persons to provide investment advice or investment management
services, types of investment account arrangements (brokerage versus
advisory), or recommendations with respect to rollovers, transfers or
distributions from a plan or IRA, including whether, in what amount, in
what form, and to what destination such a rollover, transfer or
distribution should be made.
In addition, in order to be treated as a fiduciary, such person,
either directly or indirectly (e.g., through or together with any
affiliate), must: Represent or acknowledge that it is acting as a
fiduciary within the meaning of ERISA or the Code with respect to the
advice described; represent or acknowledge that it is acting as a
fiduciary within the meaning of ERISA or the Code; render the advice
pursuant to a written or verbal agreement, arrangement or understanding
that the advice is based on the particular investment needs of the
advice recipient; or direct the advice to a specific advice recipient
or recipients regarding the advisability of a particular investment or
management decision with respect to securities or
[[Page 21211]]
other investment property of the plan or IRA.
The Regulation also provides that as a threshold matter in order to
be fiduciary advice, the communication must be a ``recommendation'' as
defined therein. The Regulation, as a matter of clarification, provides
that a variety of other communications do not constitute
``recommendations,'' including non-fiduciary investment education;
general communications; and specified communications by platform
providers. These communications which do not rise to the level of
``recommendations'' under the Regulation are discussed more fully in
the preamble to the final Regulation.
The Regulation also specifies certain circumstances where the
Department has determined that a person will not be treated as an
investment advice fiduciary even though the person's activities
technically may satisfy the definition of investment advice. For
example, the Regulation contains a provision excluding recommendations
to independent fiduciaries with financial expertise that are acting on
behalf of plans or IRAs in arm's length transactions, if certain
conditions are met. The independent fiduciary must be a bank, insurance
carrier qualified to do business in more than one state, investment
adviser registered under the Investment Advisers Act of 1940 or by a
state, broker-dealer registered under the Securities Exchange Act of
1934 (Exchange Act), or any other independent fiduciary that holds, or
has under management or control, assets of at least $50 million, and:
(1) The person making the recommendation must know or reasonably
believe that the independent fiduciary of the plan or IRA is capable of
evaluating investment risks independently, both in general and with
regard to particular transactions and investment strategies (the person
may rely on written representations from the plan or independent
fiduciary to satisfy this condition); (2) the person must fairly inform
the independent fiduciary that the person is not undertaking to provide
impartial investment advice, or to give advice in a fiduciary capacity,
in connection with the transaction and must fairly inform the
independent fiduciary of the existence and nature of the person's
financial interests in the transaction; (3) the person must know or
reasonably believe that the independent fiduciary of the plan or IRA is
a fiduciary under ERISA or the Code, or both, with respect to the
transaction and is responsible for exercising independent judgment in
evaluating the transaction (the person may rely on written
representations from the plan or independent fiduciary to satisfy this
condition); and (4) the person cannot receive a fee or other
compensation directly from the plan, plan fiduciary, plan participant
or beneficiary, IRA, or IRA owner for the provision of investment
advice (as opposed to other services) in connection with the
transaction.
Similarly, the Regulation provides that the provision of any advice
to an employee benefit plan (as described in ERISA section 3(3)) by a
person who is a swap dealer, security-based swap dealer, major swap
participant, major security-based swap participant, or a swap clearing
firm in connection with a swap or security-based swap, as defined in
section 1a of the Commodity Exchange Act (7 U.S.C. 1a) and section 3(a)
of the Exchange Act (15 U.S.C. 78c(a)) is not investment advice if
certain conditions are met. Finally, the Regulation describes certain
communications by employees of a plan sponsor, plan, or plan fiduciary
that would not cause the employee to be an investment advice fiduciary
if certain conditions are met.
Prohibited Transactions
The Department anticipates that the Regulation will cover many
investment professionals who did not previously consider themselves to
be fiduciaries under ERISA or the Code. Under the Regulation, these
entities will be subject to the prohibited transaction restrictions in
ERISA and the Code that apply specifically to fiduciaries. ERISA
section 406(a)(1)(A)-(D) and Code section 4975(c)(1)(A)-(D) prohibit
certain transactions between plans or IRAs and ``parties in interest,''
as defined in ERISA section 3(14), or ``disqualified persons,'' as
defined in Code section 4975(e)(2). Fiduciaries and other service
providers are parties in interest and disqualified persons under ERISA
and the Code. As a result, they are prohibited from engaging in (1) the
sale, exchange or leasing of property with a plan or IRA, (2) the
lending of money or other extension of credit to a plan or IRA, (3) the
furnishing of goods, services or facilities to a plan or IRA and (4)
the transfer to or use by or for the benefit of a party in interest of
plan assets.
ERISA section 406(b)(1) and Code section 4975(c)(1)(E) prohibit a
fiduciary from dealing with the income or assets of a plan or IRA in
his or her own interest or his or her own account. ERISA section
406(b)(2), which does not apply to IRAs, provides that a fiduciary
shall not ``in his individual or in any other capacity act in any
transaction involving the plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of the plan or the
interests of its participants or beneficiaries.'' ERISA section
406(b)(3) and Code section 4975(c)(1)(F) prohibit a fiduciary from
receiving any consideration for his own personal account from any party
dealing with the plan or IRA in connection with a transaction involving
assets of the plan or IRA.
Parallel regulations issued by the Departments of Labor and the
Treasury explain that these provisions impose on fiduciaries of plans
and IRAs a duty not to act on conflicts of interest that may affect the
fiduciary's best judgment on behalf of the plan or IRA.\8\ The
prohibitions extend to a fiduciary causing a plan or IRA to pay an
additional fee to such fiduciary, or to a person in which such
fiduciary has an interest that may affect the exercise of the
fiduciary's best judgment as a fiduciary. Likewise, a fiduciary is
prohibited from receiving compensation from third parties in connection
with a transaction involving the plan or IRA.\9\
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\8\ Subsequent to the issuance of these regulations,
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2010), divided
rulemaking and interpretive authority between the Secretaries of
Labor and the Treasury. The Secretary of Labor was given
interpretive and rulemaking authority regarding the definition of
fiduciary under both Title I of ERISA and the Internal Revenue Code.
Id. section 102(a) (``all authority of the Secretary of the Treasury
to issue [regulations, rulings opinions, and exemptions under
section 4975 of the Code] is hereby transferred to the Secretary of
Labor'')
\9\ 29 CFR 2550.408b-2(e); 26 CFR 54.4975-6(a)(5).
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Investment professionals typically receive compensation for
services to retirement investors in the retail market through a variety
of arrangements, which would typically violate the prohibited
transaction rules applicable to plan fiduciaries. These include
commissions paid by the plan, participant or beneficiary, or IRA, or
commissions, sales loads, 12b-1 fees, revenue sharing and other
payments from third parties that provide investment products. A
fiduciary's receipt of such payments would generally violate the
prohibited transaction provisions of ERISA section 406(b) and Code
section 4975(c)(1)(E) and (F) because the amount of the fiduciary's
compensation is affected by the use of its authority in providing
investment advice, unless such payments meet the requirements of an
exemption.
Prohibited Transaction Exemptions
As the prohibited transaction provisions demonstrate, ERISA and the
Code strongly disfavor conflicts of interest. In appropriate cases,
however,
[[Page 21212]]
the statutes provide exemptions from their broad prohibitions on
conflicts of interest. For example, ERISA section 408(b)(14) and Code
section 4975(d)(17) specifically exempt transactions involving the
provision of fiduciary investment advice to a participant or
beneficiary of an individual account plan or IRA owner if the advice,
resulting transaction, and the adviser's fees meet stringent conditions
carefully designed to guard against conflicts of interest.
In addition, the Secretary of Labor has discretionary authority to
grant administrative exemptions under ERISA and the Code on an
individual or class basis, but only if the Secretary first finds that
the exemptions are (1) administratively feasible, (2) in the interests
of plans and their participants and beneficiaries and IRA owners, and
(3) protective of the rights of the participants and beneficiaries of
such plans and IRA owners. Accordingly, fiduciary advisers may always
give advice without need of an exemption if they avoid the sorts of
conflicts of interest that result in prohibited transactions. However,
when they choose to give advice in which they have a conflict of
interest, they must rely upon an exemption.
Pursuant to its exemption authority, the Department has previously
granted several conditional administrative class exemptions that are
available to fiduciary advisers in defined circumstances. As a general
proposition, these exemptions focused on specific advice arrangements
and provided relief for narrow categories of compensation. Reliance on
these exemptions is subject to certain conditions that the Department
has found necessary to protect the interests of plans and IRAs.
In connection with the development of the Department's Regulation
under ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B), the
Department considered public input indicating the need for additional
prohibited transaction relief for the wide variety of compensation
structures that exist today in the marketplace for investment
transactions. After consideration of the issue, the Department proposed
two new class exemptions and proposed amendments to a number of
existing exemptions. As part of this initiative, the Department
proposed to incorporate the Impartial Conduct Standards, described in
greater detail below, in the new and certain existing exemptions. In
this regard, the Department proposed to incorporate the Impartial
Conduct Standards in PTEs 75-1, Part III, 75-1, Part IV, 77-4, 80-83
and 83-1. These exemptions provide relief for the following specific
transactions:
PTE 75-1, Part III \10\ permits a fiduciary to cause a
plan or IRA to purchase securities from a member of an underwriting
syndicate other than the fiduciary, when the fiduciary is also a member
of the syndicate;
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\10\ Exemptions from Prohibitions Respecting Certain Classes of
Transactions Involving Employee Benefit Plans and Certain Broker-
Dealers, Reporting Dealers and Banks, 40 FR 50845 (Oct. 31, 1975),
as amended at 71 FR 5883 (Feb. 3, 2006).
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PTE 75-1, Part IV \11\ permits a plan or IRA to purchase
securities in a principal transaction from a fiduciary that is a market
maker with respect to such securities;
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\11\ Exemptions from Prohibitions Respecting Certain Classes of
Transactions Involving Employee Benefit Plans and Certain Broker-
Dealers, Reporting Dealers and Banks, 40 FR 50845 (Oct. 31, 1975),
as amended at 71 FR 5883 (Feb. 3, 2006).
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PTE 77-4 \12\ provides relief for a plan's or IRA's
purchase or sale of open-end investment company shares where the
investment adviser for the open-end investment company is also a
fiduciary to the plan or IRA;
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\12\ Class Exemption for Certain Transactions Between Investment
Companies and Employee Benefit Plans, 42 FR 18732 (Apr. 8, 1977).
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PTE 80-83 \13\ provides relief for a fiduciary causing a
plan or IRA to purchase a security when the proceeds of the securities
issuance may be used by the issuer to retire or reduce indebtedness to
the fiduciary or an affiliate; and
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\13\ Class Exemption for Certain Transactions Involving Purchase
of Securities Where Issuer May Use Proceeds to Reduce or Retire
Indebtedness to Parties in Interest, 45 FR 73189 (Nov. 4, 1980), as
amended at 67 FR 9483 (March 1, 2002).
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PTE 83-1 \14\ provides relief for the sale of certificates
in an initial issuance of certificates, by the sponsor of a mortgage
pool to a plan or IRA, when the sponsor, trustee or insurer of the
mortgage pool is a fiduciary with respect to the plan or IRA assets
invested in such certificates.
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\14\ Class Exemption for Certain Transactions Involving Mortgage
Pool Investment Trusts, 48 FR 895 (Jan. 7, 1983), as amended at 67
FR 9483 (March 1, 2002).
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The Department's intent in proposing the amendments was to provide
additional protections for all plans, but most particularly for IRA
owners. That is because fiduciaries' dealings with IRAs are governed by
the Code, not by ERISA,\15\ and the Code, unlike ERISA, does not
directly impose responsibilities of prudence and loyalty on
fiduciaries. The amendments to the exemptions condition relief on the
satisfaction of these responsibilities. For purposes of these
amendments, the term IRA means any account or annuity described in Code
section 4975(e)(1)(B) through (F), including, for example, an
individual retirement account described in section 408(a) of the Code
and a health savings account described in section 223(d) of the
Code.\16\
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\15\ See ERISA section 404.
\16\ The Department notes that PTE 2002-13 amended PTEs 80-83
and 83-1 so that the terms ``employee benefit plan'' and ``plan''
refer to an employee benefit plan described in ERISA section 3(3)
and/or a plan described in section 4975(e)(1) of the Code. See 67 FR
9483 (March 1, 2002). At the same time, in the preamble to PTE 2002-
13, the Department explained that it had determined, after
consulting with the Internal Revenue Service, that plans described
in 4975(e)(1) of the Code are included within the scope of relief
provided by PTEs 75-1 and 77-4, because they were issued jointly by
the Department and the Service. For simplicity and consistency with
the other new exemptions and amendments to existing exemptions
published elsewhere in this issue of the Federal Register, the
Department uses this specific definition of IRA.
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These amended exemptions follow a lengthy public notice and comment
process, which gave interested persons an extensive opportunity to
comment on the proposed Regulation and exemption proposals. The
proposals initially provided for 75-day comment periods, ending on July
6, 2015, but the Department extended the comment periods to July 21,
2015. The Department then held four days of public hearings on the new
regulatory package, including the proposed exemptions, in Washington,
DC from August 10 to 13, 2015, at which over 75 speakers testified. The
transcript of the hearing was made available on September 8, 2015, and
the Department provided additional opportunity for interested persons
to comment on the proposals or hearing transcript until September 24,
2015. A total of over 3000 comment letters were received on the new
proposals. There were also over 300,000 submissions made as part of 30
separate petitions submitted on the proposal. These comments and
petitions came from consumer groups, plan sponsors, financial services
companies, academics, elected government officials, trade and industry
associations, and others, both in support and in opposition to the
rule.\17\ The Department has reviewed all comments, and after careful
consideration of the comments, has decided to grant the amendments to
the exemptions.
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\17\ As used throughout this preamble, the term ``comment''
refers to information provided through these various sources,
including written comments, petitions and witnesses at the public
hearing.
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Description of the Amendments
These amended exemptions require fiduciaries relying on the
exemptions to comply with fundamental Impartial Conduct Standards.
Generally stated, the Impartial Conduct Standards require that, in
connection with the transactions
[[Page 21213]]
covered by the exemptions, the fiduciary acts in the plan's or IRA's
best interest, does not charge more than reasonable compensation, and
does not make misleading statements to the plan or IRA about the
recommended transactions. As defined in the amendments, a fiduciary
acts in the best interest of a plan or IRA when it acts with the care,
skill, prudence, and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character
and with like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the plan or IRA, without regard
to the financial or other interests of the fiduciary, any affiliate
\18\ or other party.
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\18\ In some of the amended exemptions, the text of the Best
Interest standard does not specifically refer to an affiliate. The
reference was not necessary in those exemptions because they define
the term ``fiduciary'' to include ``such fiduciary and any
affiliates of such fiduciary.''
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The Impartial Conduct Standards represent fundamental obligations
of fair dealing and fiduciary conduct. The concepts of prudence,
undivided loyalty and reasonable compensation are all deeply rooted in
ERISA and the common law of agency and trusts.\19\ These longstanding
concepts of law and equity were developed in significant part to deal
with the issues that arise when agents and persons in a position of
trust have conflicting loyalties, and accordingly, are well-suited to
the problems posed by conflicted investment advice. The phrase
``without regard to'' is a concise expression of ERISA's duty of
loyalty, as expressed in section 404(a)(1)(A) of ERISA and applied in
the context of advice. It is consistent with the formulation stated in
the common law, and it is consistent with the language used by Congress
in Section 913(g)(1) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),\20\ and cited in the Staff of U.S.
Securities and Exchange Commission ``Study on Investment Advisers and
Broker-Dealers, As Required by Section 913 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act'' (Jan. 2011) \21\ (SEC staff
Dodd-Frank Study). The Department notes, however, that the standard is
not intended to outlaw investment advice fiduciaries' provision of
advice from investment menus that are restricted on the basis of
proprietary products or revenue sharing. Finally, the ``reasonable
compensation'' obligation is already required under ERISA section
408(b)(2) and Code section 4975(d)(2) of service providers, including
financial services providers, whether fiduciaries or not.\22\
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\19\ See generally ERISA sections 404(a), 408(b)(2); Restatement
(Third) of Trusts section 78 (2007), and Restatement (Third) of
Agency section 8.01.
\20\ Section 913(g) governs ``Standard of Conduct'' and
subsection (1) provides that ``The Commission may promulgate rules
to provide that the standard of conduct for all brokers, dealers,
and investment advisers, when providing personalized investment
advice about securities to retail customers (and such other
customers as the Commission may by rule provide), shall be to act in
the best interest of the customer without regard to the financial or
other interest of the broker, dealer, or investment adviser
providing the advice.''
\21\ Available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf.
\22\ ERISA section 408(b)(2) and Code section 4975(d)(2) exempt
certain arrangements between ERISA plans, IRAs, and non-ERISA plans,
and service providers, that otherwise would be prohibited
transactions under ERISA section 406 and Code section 4975.
Specifically, ERISA section 408(b)(2) and Code section 4975(d)(2)
provide relief from the prohibited transaction rules for service
contracts or arrangements if the contract or arrangement is
reasonable, the services are necessary for the establishment or
operation of the plan or IRA, and no more than reasonable
compensation is paid for the services.
---------------------------------------------------------------------------
Under the amendments, the Impartial Conduct Standards are
conditions of the exemptions with respect to all plans and IRAs.
Transactions that violate the requirements would not be in the
interests of or protective of plans and their participants and
beneficiaries and IRA owners. However, unlike some of the other
exemptions finalized today in this issue of the Federal Register, there
is no requirement under these exemptions that parties contractually
commit to the Impartial Conduct Standards.\23\
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\23\ The Department also points out that there is no requirement
in the other exemptions finalized today to contractually warrant
compliance with applicable federal and state laws, as was proposed.
However, it is still the Department's view that significant
violations of applicable federal or state law could also amount to
violations of the Impartial Conduct Standards, such as the best
interest standard, in which case, relief would be unavailable for
transactions occurring in connection with such violations.
---------------------------------------------------------------------------
The Department received many comments on the proposal to include
the Impartial Conduct Standards as part of these existing exemptions. A
number of commenters focused on the Department's authority to impose
the Impartial Conduct Standards as conditions of the exemptions.
Commenters' arguments regarding the Impartial Conduct Standards as
applicable to IRAs and non-ERISA plans were based generally on the fact
that the standards, as noted above, are consistent with longstanding
principles of prudence and loyalty set forth in ERISA section 404, but
which have no counterpart in the Code. Commenters took the position
that because Congress did not choose to impose the standards of
prudence and loyalty on fiduciaries with respect to IRAs and non-ERISA
plans, the Department exceeded its authority in proposing similar
standards as a condition of relief in a prohibited transaction
exemption.
With respect to ERISA plans, commenters stated that Congress'
separation of the duties of prudence and loyalty (in ERISA section 404)
from the prohibited transaction provisions (in ERISA section 406),
showed an intent that the two should remain separate. Commenters
additionally questioned why the conduct standards were necessary for
ERISA plans, when such plans already have an enforceable right to
fiduciary conduct that is both prudent and loyal. Commenters asserted
that imposing the Impartial Conduct Standards as conditions of the
exemptions created strict liability for prudence violations.
Some commenters additionally took the position that Congress, in
the Dodd-Frank Act, gave the SEC the authority to establish standards
for broker-dealers and investment advisers and therefore, the
Department did not have the authority to act in that area.
The Department disagrees that these amendments to the exemptions
exceed its authority. The Department has clear authority under ERISA
section 408(a) and the Reorganization Plan \24\ to grant administrative
exemptions from the prohibited transaction provisions of both ERISA and
the Code. Congress gave the Department broad discretion to grant or
deny exemptions and to craft conditions for those exemptions, subject
only to the overarching requirement that the exemption be
administratively feasible, in the interests of plans, plan participants
and beneficiaries and IRA owners, and protective of their rights.\25\
Nothing in ERISA or the Code suggests that the Department is forbidden
to borrow from time-honored trust-law standards and principles
developed by the courts to ensure proper fiduciary conduct.
---------------------------------------------------------------------------
\24\ See fn. 1, supra, discussing of Reorganization Plan No. 4
of 1978 (5 U.S.C. app. at 214 (2000)).
\25\ See ERISA section 408(a) and Code section 4975(c)(2).
---------------------------------------------------------------------------
The Impartial Conduct Standards represent, in the Department's
view, baseline standards of fundamental fair dealing that must be
present when fiduciaries make conflicted investment recommendations to
retirement investors. After careful consideration, the Department
determined that broad relief could be provided to investment advice
fiduciaries receiving conflicted compensation only if such fiduciaries
provided advice in accordance with the
[[Page 21214]]
Impartial Conduct Standards--i.e., if they provided prudent advice
without regard to the interests of such fiduciaries and their
affiliates and related entities, in exchange for reasonable
compensation and without misleading the investors.
These Impartial Conduct Standards are necessary to ensure that
advisers' recommendations reflect the best interest of their retirement
investor customers, rather than the conflicting financial interests of
the advisers and their financial institutions. As a result, advisers
and financial institutions bear the burden of showing compliance with
the exemption and face liability for engaging in a non-exempt
prohibited transaction if they fail to provide advice that is prudent
or otherwise in violation of the standards. The Department does not
view this as a flaw in the exemptions, as commenters suggested, but
rather as a significant deterrent to violations of important conditions
under the exemptions.
The Department similarly disagrees that Congress' directive to the
SEC in the Dodd-Frank Act limits its authority to establish appropriate
and protective conditions in the context of a prohibited transaction
exemption. Section 913 of that Act directs the SEC to conduct a study
on the standards of care applicable to brokers-dealers and investment
advisers, and issue a report containing, among other things:
an analysis of whether [sic] any identified legal or regulatory
gaps, shortcomings, or overlap in legal or regulatory standards in
the protection of retail customers relating to the standards of care
for brokers, dealers, investment advisers, persons associated with
brokers or dealers, and persons associated with investment advisers
for providing personalized investment advice about securities to
retail customers.\26\
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\26\ Dodd-Frank Act, sec. 913(d)(2)(B).
Section 913 authorizes, but does not require, the SEC to issue
rules addressing standards of care for broker-dealers and investment
advisers for providing personalized investment advice about securities
to retail customers.\27\ Nothing in the Dodd-Frank Act indicates that
Congress meant to preclude the Department's regulation of fiduciary
investment advice under ERISA or its application of such a regulation
to securities brokers or dealers. To the contrary, Dodd-Frank in
directing the SEC study specifically directed the SEC to consider the
effectiveness of existing legal and regulatory standard of care under
other federal and state authorities.\28\ The Dodd-Frank Act did not
take away the Department's responsibility with respect the definition
of fiduciary under ERISA and in the Code; nor did it qualify the
Department's authority to issue exemptions that are administratively
feasible, in the interests of plans, participants and beneficiaries,
and IRA owners, and protective of the rights of participants and
beneficiaries of the plans and IRA owners.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 80b-11(g)(1).
\28\ Dodd-Frank Act, sec. 913(b)(1) and (c)(1).
---------------------------------------------------------------------------
Some commenters suggested that it would be unnecessary to impose
the Impartial Conduct Standards on advisers with respect to ERISA
plans, as fiduciaries to these plans already are required to operate
within similar statutory fiduciary obligations. The Department
considered this comment but has determined not to eliminate the conduct
standards as conditions of the exemptions for ERISA plans.
One of the Department's goals is to ensure equal footing for all
retirement investors. The SEC staff Dodd-Frank Study required by
section 913 of the Dodd-Frank Act found that investors were frequently
confused by the differing standards of care applicable to broker-
dealers and registered investment advisers. The Department hopes to
minimize such confusion in the market for retirement advice by holding
fiduciaries to similar standards, regardless of whether they are giving
the advice to an ERISA plan, IRA, or a non-ERISA plan.
Moreover, inclusion of the standards as conditions of these
existing exemptions adds an important additional safeguard for ERISA
and IRA investors alike because the party engaging in a prohibited
transaction has the burden of showing compliance with an applicable
exemption, when violations are alleged.\29\ In the Department's view,
this burden-shifting is appropriate because of the dangers posed by
conflicts of interest, as reflected in the Department's Regulatory
Impact Analysis and the difficulties retirement investors have in
effectively policing such violations.\30\ One important way for
financial institutions to ensure that they can meet this burden is by
implementing strong anti-conflict policies and procedures, and by
refraining from creating incentives to violate the Impartial Conduct
Standards. Thus, the standards' treatment as exemption conditions
creates an important incentive for financial institutions to carefully
monitor and oversee their advisers' conduct for adherence with
fiduciary norms.
---------------------------------------------------------------------------
\29\ See e.g., Fish v. GreatBanc Trust Company, 749 F.3d 671
(7th Cir. 2014).
\30\ See Fiduciary Investment Advice Final Rule Regulatory
Impact Analysis.
---------------------------------------------------------------------------
Other commenters generally asserted that the Impartial Conduct
Standards were too vague and would result in the exemption failing to
meet the ``administratively feasible'' requirement under ERISA section
408(a) and Code section 4975(c)(2). The Department disagrees with these
commenters' suggestions that ERISA section 408(a) and Code section
4975(c)(2) fail to be satisfied by a principles-based approach, or that
standards are unduly vague. It is worth repeating that the Impartial
Conduct Standards are built on concepts that are longstanding and
familiar in ERISA and the common law of trusts and agency. Far from
requiring adherence to novel standards with no antecedents, the
exemptions primarily require adherence to well-established fundamental
obligations of fair dealing and fiduciary conduct. This preamble
provides specific interpretations and responses to a number of issues
raised in connection with a number of the Impartial Conduct Standards.
Comments on each of the Impartial Conduct Standards are discussed
below. In this regard, the Department notes that some commenters
focused their comments on the Impartial Conduct Standards in the other
exemption proposals, including the proposed Best Interest Contract
Exemption, which is finalized elsewhere in this issue of the Federal
Register. The Department determined it was important that the
provisions of the exemptions, including the Impartial Conduct
Standards, be uniform and compatible across exemptions. For this
reason, the Department considered all comments made on any of the
exemption proposals on a consolidated basis, and corresponding changes
were made across the exemptions. For ease of use, this preamble
includes the same general discussion of comments as in the Best
Interest Contract Exemption, despite the fact that some comments
discussed below were not made directly with respect to the exemptions
amended in this Notice.
1. Best Interest
Under the first Impartial Conduct Standard, fiduciaries relying on
the amended exemptions must act in the best interest of the plan or IRA
at the time of the exercise of authority (including, in the case of an
investment advice fiduciary, the recommendation). Best interest is
defined to mean acting with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent person acting in
a like capacity and familiar with such
[[Page 21215]]
matters would use in the conduct of an enterprise of a like character
and with like aims, based on the investment objectives, risk tolerance,
financial circumstances, and the needs of the plan or IRA, without
regard to the financial or other interests of the fiduciary or its
affiliates or any other party.\31\
---------------------------------------------------------------------------
\31\ As noted above, some of the amended exemptions' Best
Interest definitions do not include the term ``affiliate,'' since
the exemption defines the fiduciary to include its affiliate.
---------------------------------------------------------------------------
The Best Interest standard set forth in the amended exemptions is
based on longstanding concepts derived from ERISA and the law of
trusts. It is meant to express the concept, set forth in ERISA section
404 that a fiduciary is required to act ``solely in the interest of the
participants . . . with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.'' Similarly, both
ERISA section 404(a)(1)(A) and the trust-law duty of loyalty require
fiduciaries to put the interests of trust beneficiaries first, without
regard to the fiduciaries' own self-interest. Under this standard, for
example, a fiduciary, in choosing between two investments, could not
select an investment because it is better for the fiduciary's bottom
line, even though it is a worse choice for the plan or IRA.\32\
---------------------------------------------------------------------------
\32\ The standard does not prevent investment advice fiduciaries
from restricting their recommended investments to proprietary
products or products that generate revenue sharing. Section IV of
the Best Interest Contract Exemption specifically addresses how the
standard may be satisfied under such circumstances.
---------------------------------------------------------------------------
A wide range of commenters indicated support for a broad ``best
interest'' standard. Some comments indicated that the best interest
standard is consistent with the way advisers provide investment advice
to clients today. However, a number of these commenters expressed
misgivings as to the definition used in the proposed amendments, in
particular, the ``without regard to'' formulation. The commenters
indicated uncertainty as to the meaning of the phrase, including:
Whether it permitted the fiduciary to be paid; and whether it permitted
investment advice on proprietary products. One commenter was especially
concerned that the amendments might restrict fiduciaries' ability to
sell proprietary products, which are specifically permitted in PTE 77-
4.
Other commenters asked the Department to use a different definition
of ``Best Interest'' or simply use the exact language from ERISA's
section 404 duty of loyalty. Others suggested definitional approaches
that would require that the fiduciary ``not subordinate'' its
customers' interests to its own interests, or that the fiduciary put
its customers' interests ahead of its own interests, or similar
constructs.\33\
---------------------------------------------------------------------------
\33\ The alternative approaches are discussed in greater detail
in the preamble to the Best Interest Contract Exemption, adopted
elsewhere in today's issue of the Federal Register.
---------------------------------------------------------------------------
The Financial Industry Regulatory Authority (FINRA) \34\ suggested
that the federal securities laws should form the foundation of the Best
Interest standard. Specifically, FINRA urged that the Best Interest
definition in the exemptions incorporate the ``suitability'' standard
applicable to investment advisers and broker dealers under federal
securities laws. According to FINRA, this would facilitate customer
enforcement of the Best Interest standard by providing adjudicators
with a well-established basis on which to find a violation.
---------------------------------------------------------------------------
\34\ FINRA is registered with the Securities and Exchange
Commission (SEC) as a national securities association and is a self-
regulatory organization, as those terms are defined in the Exchange
Act, which operates under SEC oversight.
---------------------------------------------------------------------------
Other commenters found the Best Interest standard to be an
appropriate statement of the obligations of a fiduciary investment
advice provider and believed it would provide concrete protections
against conflicted recommendations. These commenters asked the
Department to maintain the Best Interest definition as proposed. One
commenter wrote that the term ``best interest'' is commonly and used in
connection with a fiduciary's duty of loyalty and cautioned the
Department against creating exemptions that failed to include the duty
of loyalty. Others urged the Department to avoid definitional changes
that would reduce current protections to plans and IRAs. Some
commenters also noted that the ``without regard to'' language is
consistent with the recommended standard in the SEC staff Dodd-Frank
Study, and suggested that it had the added benefit of potentially
harmonizing with a future securities law standard for broker-dealers.
The final amendments retain the Best Interest definition as
proposed, with minor adjustments. The first prong of the standard was
revised in each amended exemption to more closely track the statutory
language of ERISA section 404(a), and, is consistent with the
Department's intent to hold investment advice fiduciaries to a prudent
investment professional standard. Accordingly, the definition of Best
Interest now requires advice that ``reflects the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent
person acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of a like character and with like
aims, based on the investment objectives, risk tolerance, financial
circumstances, and needs of the plan or IRA . . .'' The exemptions
adopt the second prong of the proposed definition, ``without regard to
the financial or other interests of the fiduciary, any affiliate or
other party,'' without change. The Department continues to believe that
the ``without regard to'' language sets forth the appropriate,
protective standard under which a fiduciary investment adviser should
act. Many of the alternative approaches suggested by commenters pose
their own ambiguities and interpretive challenges, and lower standards
run the risk of undermining this regulatory initiative's goal of
reducing the impact of conflicts of interest on plans and IRAs.
The Department has not specifically incorporated the suitability
obligation as an element of the Best Interest standard, as suggested by
FINRA but many aspects of suitability are also elements of the Best
Interest standard. An investment recommendation that is not suitable
under the securities laws would not meet the Best Interest standard.
Under FINRA's rule 2111(a) on suitability, broker-dealers ``must have a
reasonable basis to believe that a recommended transaction or
investment strategy involving a security or securities is suitable for
the customer.'' The text of rule 2111(a), however, does not do any of
the following: Reference a best interest standard, clearly require
brokers to put their client's interests ahead of their own, expressly
prohibit the selection of the least suitable (but more remunerative) of
available investments, or require them to take the kind of measures to
avoid or mitigate conflicts of interests that are required as
conditions of these amended exemptions.
The Department recognizes that FINRA issued guidance on rule 2111
in which it explains that ``in interpreting the suitability rule,
numerous cases explicitly state that a broker's recommendations must be
consistent with his customers' best interests,'' and provided examples
of conduct that would be prohibited under this standard, including
conduct that these amended exemptions would not allow.\35\ The guidance
goes on to state
[[Page 21216]]
that ``[t]he suitability requirement that a broker make only those
recommendations that are consistent with the customer's best interests
prohibits a broker from placing his or her interests ahead of the
customer's interests.'' The Department, however is reluctant to adopt
as an express standard such guidance, which has not been formalized as
a clear rule and that may be subject to change. Additionally, FINRA's
suitability rule may be subject to interpretations which could conflict
with interpretations by the Department, and the cases cited in the
FINRA guidance, as read by the Department, involved egregious fact
patterns that one would have thought violated the suitability standard,
even without reference to the customer's ``best interest.''
---------------------------------------------------------------------------
\35\ FINRA Regulatory Notice 12-25, p. 3 (2012).
---------------------------------------------------------------------------
Accordingly, after review of the issue, the Department has decided
not to accept the comment. The Department has concluded that its
articulation of a clear loyalty standard within the exemption, rather
than by reference to the FINRA guidance, will provide clarity and
certainty to investors and better protect their interests.
The Best Interest standard, as set forth in the exemptions, is
intended to effectively incorporate the objective standards of care and
undivided loyalty that have been applied under ERISA for more than
forty years. Under these objective standards, the fiduciary must adhere
to a professional standard of care in making investments or investment
recommendations that are in the plan's or IRA's Best Interest. The
fiduciary may not base his or her discretionary acquisitions or
recommendations on the fiduciary's own financial interest in the
transaction. Nor may the fiduciary acquire or recommend the investment
unless it meets the objective prudent person standard of care.
Additionally, the duties of loyalty and prudence embodied in ERISA are
objective obligations that do not require proof of fraud or
misrepresentation, and full disclosure is not a defense to making
imprudent acquisitions or recommendations or favoring one's own
interests at the plan's or IRA's expense.
Several commenters requested additional guidance on the Best
Interest standard. Fiduciaries that are concerned about satisfying the
standard may wish to consult the policies and procedures requirement in
Section II(d) of the Best Interest Contract Exemption. While these
policies and procedures are not a condition of these amended
exemptions, they may provide useful guidance for financial institutions
wishing to ensure that individual advisers adhere to the Impartial
Conduct Standards. The preamble to the Best Interest Contract Exemption
provides examples of policies and procedures prudently designed to
ensure that advisers adhere to the Impartial Conduct Standards. The
examples are not intended to be exhaustive or mutually exclusive, and
range from examples that focus on eliminating or nearly eliminating
compensation differentials to examples that permit, but police, the
differentials.
A few commenters also questioned the requirement in the Best
Interest standard that recommendations be made without regard to the
interests of the fiduciary, any affiliate or ``other party.'' The
commenters indicated they did not know the purpose of the reference to
``other parties'' and asked that it be deleted. The Department intends
the reference to make clear that a fiduciary operating within the
Impartial Conduct Standards should not take into account the interests
of any party other than the plan or IRA--whether the other party is
related to the fiduciary or not. For example, an entity that may be
unrelated to the fiduciary but could still constitute an ``other
party,'' for these purposes, is the manufacturer of the investment
product being acquired or recommended.
Other commenters asked for confirmation that the Best Interest
standard is applied based on the facts and circumstances as they
existed at the time of the fiduciary's action, and not based on
hindsight. Consistent with the well-established legal principles that
exist under ERISA today, the Department confirms that the Best Interest
standard is not a hindsight standard, but rather is based on the facts
as they existed at the time of the transaction. Thus, the courts have
evaluated the prudence of a fiduciary's actions under ERISA by focusing
on the process the fiduciary used to reach its determination or
recommendation--whether the fiduciary, ``at the time they engaged in
the challenged transactions, employed the proper procedures to
investigate the merits of the investment and to structure the
investment.'' \36\ The standard does not measure compliance by
reference to how investments subsequently performed or turn fiduciaries
into guarantors of investment performance, even though they gave advice
that was prudent and loyal at the time of transaction.\37\
---------------------------------------------------------------------------
\36\ Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983).
\37\ One commenter requested an adjustment to the ``prudence''
component of the Best Interest standard, under which the standard
would be that of a ``prudent person serving clients with similar
retirement needs and offering a similar array of products.'' In this
way, the commenter sought to accommodate varying perspectives and
opinions on particular investment products and business practices.
The Department disagrees with the comment, which could be read as
qualifying the stringency of the prudence obligation based on the
fiduciary's independent decisions on which products to offer, rather
than on the needs of the particular retirement investor. Therefore,
the Department did not adopt this suggestion.
---------------------------------------------------------------------------
This is not to suggest that the ERISA section 404 prudence standard
or Best Interest standard, are solely procedural standards. Thus, the
prudence standard, as incorporated in the Best Interest standard, is an
objective standard of care that requires investment advice fiduciaries
to investigate and evaluate investments, make recommendations, and
exercise sound judgment in the same way that knowledgeable and
impartial professionals would. ``[T]his is not a search for subjective
good faith--a pure heart and an empty head are not enough.'' \38\
Whether or not the fiduciary is actually familiar with the sound
investment principles necessary to make particular recommendations, the
fiduciary must adhere to an objective professional standard.
Additionally, fiduciaries are held to a particularly stringent standard
of prudence when they have a conflict of interest.\39\ For this reason,
the Department declines to provide a safe harbor based on ``procedural
prudence'' as requested by a commenter.
---------------------------------------------------------------------------
\38\ Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983),
cert. denied, 467 U.S. 1251 (1984); see also DiFelice v. U.S.
Airways, Inc., 497 F.3d 410, 418 (4th Cir. 2007) (``Good faith does
not provide a defense to a claim of a breach of these fiduciary
duties; `a pure heart and an empty head are not enough.' '').
\39\ Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982)
(``the[ ] decisions [of the fiduciary] must be made with an eye
single to the interests of the participants and beneficiaries'');
see also Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 298 (5th Cir.
2000); Leigh v. Engle, 727 F.2d 113, 126 (7th Cir. 1984).
---------------------------------------------------------------------------
The Department additionally confirms its intent that the phrase
``without regard to'' be given the same meaning as the language in
ERISA section 404 that requires a fiduciary to act ``solely in the
interest of'' participants and beneficiaries, as such standard has been
interpreted by the Department and the courts. Therefore, the standard
would not, as some commenters suggested, foreclose the fiduciary from
being paid. In response to concerns about the satisfaction of the
standard in the context of proprietary product recommendations or
investment menus limited to proprietary products and/or investments
that generate third party payments, the Department has revised Section
IV of the Best Interest Contract Exemption to provide additional
clarity and specific guidance on this issue.
In response to commenter concerns, the Department also confirms
that the
[[Page 21217]]
Best Interest standard does not impose an unattainable obligation on
fiduciaries to somehow identify the single ``best'' investment for the
plan or IRA out of all the investments in the national or international
marketplace, assuming such advice were even possible. Instead, as
discussed above, the Best Interest standard set out in the exemptions
incorporates two fundamental and well-established fiduciary
obligations: The duties of prudence and loyalty. Thus, the fiduciary's
obligation under the Best Interest standard is to act in accordance
with the professional standards of prudence, and to put the plan's or
IRA's financial interests in the driver's seat, rather than the
competing interests of the fiduciary or other parties.
Finally, in response to questions regarding the extent to which
this Best Interest standard or other provisions of the amendments
impose an ongoing monitoring obligation on fiduciaries, the text does
not impose a monitoring requirement, but instead leaves that to the
parties. This is consistent with the Department's interpretation of an
investment advice fiduciary's monitoring responsibility as articulated
in the preamble to the Regulation.
2. Reasonable Compensation
The Impartial Conduct Standards also include the reasonable
compensation standard. Under this standard, compensation received by
the fiduciary and its affiliates in connection with the applicable
transaction may not exceed compensation for services that is reasonable
within the meaning of ERISA section 408(b)(2) and Code section
4975(d)(2).
The obligation to pay no more than reasonable compensation to
service providers is long recognized under ERISA and the Code. ERISA
section 408(b)(2) and Code section 4975(d)(2), require that services
arrangements involving plans and IRAs result in no more than reasonable
compensation to the service provider. Accordingly fiduciaries--as
service providers--have long been subject to this requirement,
regardless of their fiduciary status. At bottom, the standard simply
requires that compensation not be excessive, as measured by the market
value of the particular services, rights, and benefits the fiduciary is
delivering to the plan or IRA. Given the conflicts of interest
associated with the commissions and other payments covered by the
exemptions, and the potential for self-dealing, it is particularly
important that fiduciaries adhere to these statutory standards, which
are rooted in common law principles.\40\
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\40\ See generally Restatement (Third) of Trusts section 38
(2003).
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Several commenters supported this standard. The requirement that
compensation be limited to what is reasonable is an important
protection of the exemptions and a well-established standard, they
said. A number of other commenters requested greater specificity as to
the meaning of the reasonable compensation standard. As proposed, the
standard stated that all compensation received by the fiduciary and its
affiliates in connection with the transaction must be reasonable in
relation to the total services the fiduciary and its affiliates provide
to the plan or IRA. Some commenters stated that the proposed reasonable
compensation standard was too vague. Because the language of the
proposal did not reference ERISA section 408(b)(2) and Code section
4975(d)(2), commenters asked whether the standard differed from those
statutory provisions. In particular, some commenters questioned the
meaning of the proposed language ``in relation to the total services
the fiduciary provides to the plan or IRA.'' The commenters indicated
that the proposal did not adequately explain this formulation of the
reasonable compensation standard.
There was concern that the standard could be applied retroactively
rather than based on the parties' reasonable beliefs as to the
reasonableness of the compensation at the time of the recommendation.
Commenters also indicated uncertainty as to how to comply with the
condition and asked whether it would be necessary to survey the market
to determine market rates. Some commenters requested that the
Department include the words ``and customary'' in the reasonable
compensation definition, to specifically permit existing compensation
arrangements. One commenter raised the concern that the reasonable
compensation determination raised antitrust concerns because it would
require investment advice fiduciaries to agree upon a market rate and
result in anti-competitive behavior.
Commenters also asked the Department to provide examples of
scenarios that met the reasonable compensation standard and safe
harbors and others requested examples of scenarios that would fail to
meet these standards. FINRA and other commenters suggested that the
Department incorporate existing FINRA rules 2121 and 2122, and NASD
rule 2830 regarding the reasonableness of compensation for broker-
dealers.\41\
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\41\ FINRA's comment letter described NASD rule 2830 as imposing
specific caps on compensation with respect to investment company
securities that broker-dealers may sell. While the Department views
this cap as an important protection of investors, it establishes an
outside limit rather than a standard of reasonable compensation.
---------------------------------------------------------------------------
Commenters also asked how the standard would be satisfied for
proprietary products. One commenter indicated that the calculation
should not include affiliates' or related entities' compensation as
this would appear to put them at a comparative disadvantage.
Finally, a few commenters took the position that the reasonable
compensation determination should not be a requirement of an exemption.
In their view, a plan fiduciary that is not providing investment advice
or exercising investment discretion should decide the reasonableness of
the compensation paid to the one who is. Another commenter suggested
that if an independent plan fiduciary sets the menu of investment
options this should be sufficient to comply with the reasonable
compensation standard.
In response to comments on this requirement, the Department has
retained the reasonable compensation standard as a condition of the
amended exemptions. As noted above, the ``reasonable compensation''
obligation is a feature of ERISA and the Code under current law that
has long applied to financial services providers, whether fiduciaries
or not. The standard is also applicable to fiduciaries under the common
law of agency and trusts. It is particularly important that fiduciaries
adhere to these standards when engaging in the transactions covered
under these amended exemptions, so as to avoid exposing plans and IRAs
to harms associated with conflicts of interest.
Although some commenters suggested that the reasonable compensation
determination be made by another plan fiduciary, the exemptions (like
the statutory obligation) obligate fiduciaries to avoid overcharging
their plan and IRA customers, despite the conflicts of interest
associated with their compensation. Fiduciaries and other services
providers may not charge more than reasonable compensation regardless
of whether another fiduciary has signed off on the compensation.
Nothing in the exemptions, however, precludes fiduciaries from seeking
impartial review of their fee structures to safeguard against abuse,
and they may well want to include such reviews in their policies and
procedures.
[[Page 21218]]
Further, the Department disagrees that the requirement is
inconsistent with antitrust laws. Nothing in the exemption contemplates
or requires that Advisers or Financial Institutions agree upon a price
with their competitors. The focus of the reasonable compensation
condition is on preventing overcharges to retirement investors, not
promoting anti-competitive practices. Indeed, if Advisors and Financial
Institutions consulted with competitors to set prices, the agreed-upon
prices could well violate the condition.
In response to comments, however, the operative text of the final
amendments was clarified to provide that, to the extent it applies to
services, the reasonable compensation standard is the same as the well-
established requirement set forth in ERISA section 408(b)(2) and Code
section 4975(d)(2), and the regulations thereunder. The reasonableness
of the fees depends on the particular facts and circumstances at the
time of the recommendation. Several factors inform whether compensation
is reasonable including, inter alia, the market pricing of service(s)
provided and the underlying asset(s), the scope of monitoring, and the
complexity of the product. No single factor is dispositive in
determining whether compensation is reasonable; the essential question
is whether the charges are reasonable in relation to what the investor
receives. Consistent with the Department's prior interpretations of
this standard, the Department confirms that a fiduciary does not have
to recommend the transaction that is the lowest cost or that generates
the lowest fees without regard to other relevant factors. In this
regard, the Department declines to specifically reference FINRA's
standard in the exemptions, but rather relies on ERISA's own
longstanding reasonable compensation formulation.
In response to concerns about application of the standard to
investment products that bundle together services and investment
guarantees or other benefits, the Department responds that the
reasonable compensation condition is intended to apply to the
compensation received by the Financial Institution, Adviser,
Affiliates, and Related Entities in same manner as the reasonable
compensation condition set forth in ERISA section 408(b)(2) and Code
section 4975(d)(2). Accordingly, the exemption's reasonable
compensation standard covers compensation received directly from the
plan or IRA and indirect compensation received from any source other
than the plan or IRA in connection with the recommended
transaction.\42\ When assessing the reasonableness of a charge, one
generally needs to consider the value of all the services and benefits
provided for the charge, not just some. If parties need additional
guidance in this respect, they should refer to the Department's
interpretations under ERISA section 408(b)(2) and Code section
4975(d)(2) and the Department will provide additional guidance if
necessary.
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\42\ Such compensation includes, for example charges against the
investment, such as commissions, sales loads, sales charges,
redemption fees, surrender charges, exchange fees, account fees and
purchase fees, as well as compensation included in operating
expenses and other ongoing charges, such as wrap fees.
---------------------------------------------------------------------------
A commenter urged the Department to provide that compensation
received by an Affiliate would not have to be considered in applying
the reasonable compensation standard. According to the commenter,
including such compensation in the assessment of reasonable
compensation would place proprietary products at a disadvantage. The
Department disagrees with the proposition that a proprietary product
would be disadvantaged merely because more of the compensation goes to
affiliated parties than in the case of competing products, which
allocate more of the compensation to non-affiliated parties. The
availability of the exemptions, however, does not turn on how
compensation is allocated between affiliates and non-affiliates.
Certainly, the Department would not expect that a proprietary product
would be at a disadvantage in the marketplace because it carefully
ensures that the associated compensation is reasonable. Assuming the
Best Interest standard is satisfied and the compensation is reasonable,
the exemption should not impede the recommendation of proprietary
products. Accordingly, the Department disagrees with the commenter. The
Department declines suggestions to provide specific examples of
``reasonable'' amounts or specific safe harbors. Ultimately, the
``reasonable compensation'' standard is a market based standard. As
noted above, the standard incorporates the familiar ERISA section
408(b)(2) and Code section 4975(d)(2) standards The Department is
unwilling to condone all ``customary'' compensation arrangements and
declines to adopt a standard that turns on whether the agreement is
``customary.'' For example, it may in some instances be ``customary''
to charge customers fees that are not transparent or that bear little
relationship to the value of the services actually rendered, but that
does not make the charges reasonable. Finally, the Department notes
that all recommendations are subject to the overarching Best Interest
standard, which incorporates the fundamental fiduciary obligations of
prudence and loyalty. An imprudent recommendation for an investor to
overpay for an investment transaction would violate that standard,
regardless of whether the overpayment was attributable to compensation
for services, a charge for benefits or guarantees, or something else.
3. Misleading Statements
The final Impartial Conduct Standard requires that statements by
the fiduciaries to the plans and IRAs about the recommended
transaction, fees and compensation, material conflicts of interest, and
any other matters relevant to a plan's or IRA owner's investment
decisions, may not be materially misleading at the time they are made.
In response to commenters, the Department added a materiality
standard to the definition of material conflict of interest and
adjusted the text to clarify that the standard is measured at the time
of the representations, i.e., the statements must not be misleading
``at the time they are made.''
A number of commenters focused on the definition of material
conflict of interest used in the proposals. As proposed, a material
conflict of interest would have existed when a fiduciary ``has a
financial interest that could affect the exercise of its best judgment
as a fiduciary in rendering advice to a plan or IRA owner.'' Some
commenters took the position that the proposal did not adequately
explain the term ``material'' or incorporate a ``materiality'' standard
into the definition.
However, another commenter indicated that the Department should not
use the term ``material'' in the definition of conflict of interest.
The commenter believed that it could result in a standard that was too
subjective from the perspective of the fiduciary relying on the
exemption, and could undermine the protectiveness of the exemption.
After consideration of the comments, the Department adjusted the
definition of material conflict of interest to provide that a material
conflict of interest exists when the fiduciary has a ``financial
interest that a reasonable person would conclude could affect the
exercise of its best judgment as a fiduciary in rendering advice to a
plan or IRA owner.'' This language responds to concerns about the
breadth and potential subjectivity of the standard.
[[Page 21219]]
The Department did not accept certain other comments. One commenter
requested that the standard indicate that the statements must have been
reasonably relied on by the plan or IRA. The Department rejected the
comment. The Department's aim is to ensure that fiduciaries uniformly
adhere to the Impartial Conduct Standards, including the obligation to
avoid materially misleading statements, when they exercise discretion
or provide investment advice to plans and IRAs.
One commenter asked the Department to require only that the
fiduciary ``reasonably believe'' the statements are not misleading. The
Department is concerned that this standard could undermine the
protections of this condition, by requiring plans and IRAs to prove the
fiduciary's actual belief rather than focusing on whether the statement
is objectively misleading. However, to address commenters' concerns
about the risks of engaging in a prohibited transaction, as noted
above, the Department has clarified that the standard is measured at
the time of the representations and has added a materiality standard.
The Department believes that plans and IRAs are best served by
statements and representations that are free from material
misstatements. Fiduciaries best avoid liability--and best promote the
interests of the plans and IRAs--by ensuring that accurate
communications are a consistent standard in all their interactions with
their customers.
A commenter suggested that the Department adopt FINRA's
``Frequently Asked Questions regarding Rule 2210'' in this
connection.\43\ FINRA's rule 2210, Communications with the Public, sets
forth a number of procedural rules and standards that are designed to,
among other things, prevent broker-dealer communications from being
misleading. The Department agrees that adherence to FINRA's standards
can promote materially accurate communications, and certainly believes
that fiduciaries should pay careful attention to such guidance
documents. After review of the rule and FAQs, however, the Department
declines to simply adopt FINRA's guidance, which addresses written
communications, since the condition of the exemptions is broader in
this respect. In the Department's view, the meaning of the standard is
clear, and is already part of a plan fiduciary's obligations under
ERISA. If, however, issues arise in implementation of the exemptions,
the Department will consider requests for additional guidance.
---------------------------------------------------------------------------
\43\ Currently available at http://www.finra.org/industry/finra-rule-2210-questions-and-answers.
---------------------------------------------------------------------------
Failure to Disclose
Commenters expressed concern about the statement in the third
Impartial Conduct Standard that ``failure to disclose a material
conflict of interest . . . is deemed to be a misleading statement.''
The commenters indicated that, without a materiality standard, this
language would result in an overly broad and uncertain disclosure
requirement. The requirement would be especially burdensome in light of
the potential consequences of engaging in a non-exempt prohibited
transaction, including rescission, repayment of lost earnings, excise
tax, and personal liability, commenters said. One commenter stated that
this was effectively a change to the existing disclosure requirements
of the exemptions, particularly PTE 77-4.
The Department has considered these comments. As noted above, the
amended exemptions include a materiality standard in the definition of
material conflict of interest. Nevertheless, the Department was
persuaded by commenters to eliminate the statement from the third
Impartial Conduct Standard. When viewed as a whole, the Department
believes the conditions already existing in these exemptions, with the
addition of the Impartial Conduct Standards adopted in these final
amendments, provide sufficient protections to retirement investors
without this additional disclosure provision.
4. PTE 77-4
The Department received some comments specific to PTE 77-4 that
were generally outside the scope of these amendments. A few commenters
requested that PTE 77-4 be amended to permit fiduciaries to rely on
negative consent under the exemption. Another commenter requested
amendments or interpretations relating to the extent of relief provided
by the exemption. For example, one commenter requested that the
Department clarify that the prospectus delivery requirement found at
PTE 77-4 section II(d) may be satisfied by identifying a Web site
address where investment materials can be obtained. This commenter also
requested that PTE 77-4 be expanded to include investments in
commingled trusts and exchange-traded funds.
Regardless of possible merit, these requests raise issues outside
the scope of these amendments. The amendments were focused on the
implementation of the Impartial Conduct Standards with respect to these
existing class exemptions, and were not intended to address other
issues with respect to these exemptions. The issues raised in these
comments were not proposed and commenters did not have the opportunity
to address them. Therefore, the comments were not accepted at this
time. Parties wishing to pursue these comments may seek an advisory
opinion or an amendment to PTE 77-4 from the Department.
Applicability Date
The Regulation will become effective June 7, 2016 and these amended
exemptions are issued on that same date. The Regulation is effective at
the earliest possible effective date under the Congressional Review
Act. For the exemptions, the issuance date serves as the date on which
the amended exemptions are intended to take effect for purposes of the
Congressional Review Act. This date was selected in order to provide
certainty to plans, plan fiduciaries, plan participants and
beneficiaries, IRAs, and IRA owners that the new protections afforded
by the Regulation are officially part of the law and regulations
governing their investment advice providers, and to inform financial
services providers and other affected service providers that the
Regulation and amended exemptions are final and not subject to further
amendment or modification without additional public notice and comment.
The Department expects that this effective date will remove uncertainty
as an obstacle to regulated firms allocating capital and other
resources toward transition and longer term compliance adjustments to
systems and business practices.
The Department has also determined that, in light of the importance
of the Regulation's consumer protections and the significance of the
continuing monetary harm to retirement investors without the rule's
changes, that an Applicability Date of April 10, 2017, is appropriate
for plans and their affected financial services and other service
providers to adjust to the basic change from non-fiduciary to fiduciary
status. The amendments as finalized herein have the same Applicability
Date; parties may therefore rely on the amended exemptions beginning on
the Applicability Date.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve
a fiduciary or other party in interest or disqualified
[[Page 21220]]
person with respect to a plan from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of ERISA section 404 which require, among other things, that
a fiduciary discharge his or her duties respecting the plan solely in
the interests of the plan's participants and beneficiaries and in a
prudent fashion in accordance with ERISA section 404(a)(1)(B);
(2) The Department finds that the amended exemptions are
administratively feasible, in the interests of plans and their
participants and beneficiaries and IRA owners, and protective of the
rights of plans' participants and beneficiaries and IRA owners;
(3) The amended exemptions are applicable to a particular
transaction only if the transactions satisfy the conditions specified
in the amendments;
(4) The amended exemptions are supplemental to, and not in
derogation of, any other provisions of ERISA and the Code, including
statutory or administrative exemptions and transitional rules.
Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Amendments to Class Exemptions
I. Prohibited Transaction Exemption 75-1, Part III
The Department amends Prohibited Transaction Exemption 75-1, Part
III, under the authority of ERISA section 408(a) and Code section
4975(c)(2), and in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637, October 27, 2011).
A. A new section III(f) is inserted to read as follows:
(f) Standards of Impartial Conduct. If the fiduciary is a fiduciary
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code
section 4975(e)(3)(A) or (B) with respect to the assets of a plan or
IRA involved in the transaction, the fiduciary must comply with the
following conditions with respect to the transaction:
(1) The fiduciary acts in the Best Interest of the plan or IRA at
the time of the transaction.
(2) All compensation received by the fiduciary in connection with
the transaction neither exceeds compensation for services that is
reasonable within the meaning of ERISA section 408(b)(2) and Code
section 4975(d)(2).
(3) The fiduciary's statements about recommended investments, fees
and compensation, material conflicts of interest, and any other matters
relevant to the plan's or IRA owner's investment decisions, are not
materially misleading at the time they are made. A ``material conflict
of interest'' exists when a fiduciary has a financial interest that a
reasonable person would conclude could affect the exercise of its best
judgment as a fiduciary in rendering advice to the plan or IRA owner.
For purposes of this section, a fiduciary acts in the ``Best
Interest'' of the plan or IRA when the fiduciary acts with the care,
skill, prudence, and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character
and with like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the plan or IRA, without regard
to the financial or other interests of the fiduciary or any other
party. Also for the purposes of this section, the term IRA means any
account or annuity described in Code section 4975(e)(1)(B) through (F),
including, for example, an individual retirement account described in
section 408(a) of the Code and a health savings account described in
section 223(d) of the Code.
B. Sections III(f) and III(g) are redesignated, respectively, as
sections III(g) and III(h).
II. Prohibited Transaction Exemption 75-1, Part IV
The Department amends Prohibited Transaction Exemption 75-1, Part
IV, under the authority of ERISA section 408(a) and Code section
4975(c)(2), and in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637, October 27, 2011).
A. A new section IV(e) is inserted to read as follows:
(e) Standards of Impartial Conduct. If the fiduciary is a fiduciary
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code
section 4975(e)(3)(A) or (B) with respect to the assets of the plan or
IRA involved in the transaction, the fiduciary must comply with the
following conditions with respect to the transaction:
(1) The fiduciary acts in the Best Interest of the plan or IRA at
the time of the transaction.
(2) All compensation received by the fiduciary in connection with
the transaction neither exceeds compensation for services that is
reasonable within the meaning of ERISA section 408(b)(2) and Code
section 4975(d)(2).
(3) The fiduciary's statements about recommended investments, fees
and compensation, material conflicts of interest, and any other matters
relevant to the plan's or IRA owner's investment decisions, are not
materially misleading at the time they are made. A ``material conflict
of interest'' exists when a fiduciary has a financial interest that a
reasonable person would conclude could affect the exercise of its best
judgment as a fiduciary in rendering advice to the plan or IRA owner.
For purposes of this section, a fiduciary acts in the ``Best
Interest'' of the plan or IRA when the fiduciary acts with the care,
skill, prudence, and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character
and with like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the plan or IRA, without regard
to the financial or other interests of the fiduciary or any other
party. Also for the purposes of this section, the term IRA means any
account or annuity described in Code section 4975(e)(1)(B) through (F),
including, for example, an individual retirement account described in
section 408(a) of the Code and a health savings account described in
section 223(d) of the Code.
B. Sections IV(e) and IV(f) are redesignated, respectively, as
sections IV(f) and IV(g).
III. Prohibited Transaction Exemption 77-4
The Department amends Prohibited Transaction Exemption 77-4 under
the authority of ERISA section 408(a) and Code section 4975(c)(2), and
in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, October 27, 2011).
A new section II(g) is inserted to read as follows:
(g) Standards of Impartial Conduct. If the fiduciary is a fiduciary
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code
section 4975(e)(3)(A) or (B) with respect to the assets of the plan or
IRA involved in the transaction, the fiduciary must comply with the
following conditions with respect to the transaction:
(1) The fiduciary acts in the Best Interest of the plan or IRA at
the time of the transaction.
(2) All compensation received by the fiduciary and its affiliates
in connection with the transaction neither exceeds
[[Page 21221]]
compensation for services that is reasonable within the meaning of
ERISA section 408(b)(2) and Code section 4975(d)(2).
(3) The fiduciary's statements about recommended investments, fees
and compensation, material conflicts of interest, and any other matters
relevant to the plan's or IRA owner's investment decisions, are not
materially misleading at the time they are made. A ``material conflict
of interest'' exists when a fiduciary has a financial interest that a
reasonable person would conclude could affect the exercise of its best
judgment as a fiduciary in rendering advice to the plan or IRA owner.
For purposes of this section, a fiduciary acts in the ``Best
Interest'' of the plan or IRA when the fiduciary acts with the care,
skill, prudence, and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character
and with like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the plan or IRA, without regard
to the financial or other interests of the fiduciary, any affiliate or
other party. Also for the purposes of this section, the term IRA means
any account or annuity described in Code section 4975(e)(1)(B) through
(F), including, for example, an individual retirement account described
in section 408(a) of the Code and a health savings account described in
section 223(d) of the Code.
IV. Prohibited Transaction Exemption 80-83
The Department amends Prohibited Transaction Exemption 80-83 under
the authority of ERISA section 408(a) and Code section 4975(c)(2), and
in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, October 27, 2011).
A. A new section II(A)(2) is inserted to read as follows:
(2) Standards of Impartial Conduct. If the fiduciary is a fiduciary
within the meaning of section 3(21)(A)(i) or (ii) of the Act, or Code
section 4975(e)(3)(A) or (B) with respect to the assets of the plan or
IRA involved in the transaction, the fiduciary must comply with the
following conditions with respect to the transaction:
(a) The fiduciary acts in the Best Interest of the plan or IRA at
the time of the transaction.
(b) All compensation received by the fiduciary and its affiliates
in connection with the transaction neither exceeds compensation for
services that is reasonable within the meaning of ERISA section
408(b)(2) and Code section 4975(d)(2).
(c) The fiduciary's statements about recommended investments, fees
and compensation, material conflicts of interest, and any other matters
relevant to the plan's or IRA owner's investment decisions, are not
materially misleading at the time they are made. A ``material conflict
of interest'' exists when a fiduciary has a financial interest that a
reasonable person would conclude could affect the exercise of its best
judgment as a fiduciary in rendering advice to the plan or IRA owner.
For purposes of this section, a fiduciary acts in the ``Best
Interest'' of the employee benefit plan or IRA when the fiduciary acts
with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of
a like character and with like aims, based on the investment
objectives, risk tolerance, financial circumstances, and needs of the
employee benefit plan or IRA, without regard to the financial or other
interests of the fiduciary, any affiliate or other party. Also for the
purposes of this section, the term IRA means any account or annuity
described in Code section 4975(e)(1)(B) through (F), including, for
example, an individual retirement account described in section 408(a)
of the Code and a health savings account described in section 223(d) of
the Code.
B. Section II(A)(2) is redesignated as section II(A)(3).
V. Prohibited Transaction Exemption 83-1
The Department amends Prohibited Transaction Exemption 83-1 under
the authority of ERISA section 408(a) and Code section 4975(c)(2), and
in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, October 27, 2011).
A. A new section II(B) is inserted to read as follows:
(B) Standards of Impartial Conduct. Solely with respect to the
relief provided under section I(B), if the sponsor, trustee or insurer
of such pool who is a fiduciary is a fiduciary within the meaning of
section 3(21)(A)(i) or (ii) of the Act, or Code section 4975(e)(3)(A)
or (B) with respect to the assets of the plan or IRA involved in the
transaction, the fiduciary must comply with the following conditions
with respect to the transaction:
(1) The fiduciary acts in the Best Interest of the plan or IRA at
the time of the transaction.
(2) All compensation received by the fiduciary and its affiliates
in connection with the transaction neither exceeds compensation for
services that is reasonable within the meaning of ERISA section
408(b)(2) and Code section 4975(d)(2).
(3) The fiduciary's statements about recommended investments, fees
and compensation, material conflicts of interest, and any other matters
relevant to the plan's or IRA owner's investment decisions, are not
materially misleading at the time they are made. A ``material conflict
of interest'' exists when a fiduciary has a financial interest that a
reasonable person would conclude could affect the exercise of its best
judgment as a fiduciary in rendering advice to the plan or IRA owner.
For purposes of this section, a fiduciary acts in the ``Best
Interest'' of the plan or IRA when the fiduciary acts with the care,
skill, prudence, and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character
and with like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the plan or IRA, without regard
to the financial or other interests of the plan or IRA to the financial
interests of the fiduciary, any affiliate or other party. Also for the
purposes of this section, the term IRA means any account or annuity
described in Code section 4975(e)(1)(B) through (F), including, for
example, an individual retirement account described in section 408(a)
of the Code and a health savings account described in section 223(d) of
the Code.
Signed at Washington, DC, this 1st day of April, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2016-07930 Filed 4-6-16; 11:15 am]
BILLING CODE 4510-29-P