Rule2024-08066
Amendment to Prohibited Transaction Exemption 2020-02
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 25, 2024
Effective
September 23, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a notice of amendment to class prohibited transaction exemption (PTE) 2020-02, which provides relief for investment advice fiduciaries to receive certain compensation that otherwise would be prohibited. The amendment affects participants and beneficiaries of employee benefit plans, individual retirement account (IRA) owners, and fiduciaries with respect to such plans and IRAs.
Full Text
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<title>Federal Register, Volume 89 Issue 81 (Thursday, April 25, 2024)</title>
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[Federal Register Volume 89, Number 81 (Thursday, April 25, 2024)]
[Rules and Regulations]
[Pages 32260-32299]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-08066]
[[Page 32259]]
Vol. 89
Thursday,
No. 81
April 25, 2024
Part V
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Amendment to Prohibited Transaction Exemption 2020-02; Final Rule
Federal Register / Vol. 89 , No. 81 / Thursday, April 25, 2024 /
Rules and Regulations
[[Page 32260]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12057]
ZRIN 1210-ZA32
Amendment to Prohibited Transaction Exemption 2020-02
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Amendment to Class Exemption PTE 2020-02.
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SUMMARY: This document contains a notice of amendment to class
prohibited transaction exemption (PTE) 2020-02, which provides relief
for investment advice fiduciaries to receive certain compensation that
otherwise would be prohibited. The amendment affects participants and
beneficiaries of employee benefit plans, individual retirement account
(IRA) owners, and fiduciaries with respect to such plans and IRAs.
DATES: The amendment is effective September 23, 2024.
FOR FURTHER INFORMATION CONTACT: Susan Wilker, telephone (202) 693-
8540, Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor (this is not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
The Employee Retirement Income Security Act of 1974 (ERISA)
provides, in relevant part, that a person is a fiduciary with respect
to a plan to the extent they render investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys or
other property of such plan, or have any authority or responsibility to
do so.\1\ Title I of ERISA (referred to herein as Title I) imposes
duties and restrictions on persons who are ``fiduciaries'' with respect
to employee benefit plans. ERISA section 404 provides that Title I plan
fiduciaries must act 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,'' and
that they also must discharge their duties with respect to a plan
``solely in the interest of the participants and beneficiaries.'' \2\
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\1\ Section 3(21)(A)(ii) is codified at 29 U.S.C.
1002(3)(21)(A)(ii). The provision is in Title I of the ERISA
(referred to herein as Title I), which is codified in Title 29 of
the U.S. Code. This preamble refers to the codified provisions in
Title I by reference to sections of ERISA, as amended, and not by
their numbering in Section 29 of the U.S. Code.
\2\ ERISA section 404(a).
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In addition to fiduciary obligations, ERISA has prohibited
transaction rules that ``categorically bar[]'' plan fiduciaries from
engaging in transactions deemed ``likely to injure the pension plan.''
\3\ These prohibitions broadly forbid a fiduciary from ``deal[ing] with
the assets of the plan in his own interest or for his own account,''
and ``receiv[ing] any consideration for his own personal account from
any party dealing with such plan in connection with a transaction
involving the assets of the plan.'' \4\ Congress gave the Department of
Labor (the Department) broad authority to grant conditional
administrative exemptions from the prohibited transaction provisions,
but only if the Department finds that the exemption is (1)
administratively feasible for the Department, (2) in the interests of
the plan and of its participants and beneficiaries, and (3) protective
of the rights of participants and beneficiaries of such plan.\5\
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\3\ Harris Trust Sav. Bank v. Salomon Smith Barney Inc., 530
U.S. 238, 241-42 (2000) (citation and quotation marks omitted).
\4\ ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).
\5\ ERISA section 408(a), 29 U.S.C. 1108(a).
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ERISA's Title II (also referred to herein as the Code), includes a
parallel provision in section 4975(e)(3)(B), which defines a fiduciary
of a tax-qualified plan, including individual retirement accounts
(IRAs). Title II governs the conduct of fiduciaries to plans defined in
Code section 4975(e)(1), which includes IRAs.\6\ Some plans defined in
Code section 4975(e)(1) are also covered by Title I of ERISA, but the
definitions of such plans are not identical. Although Title II does not
directly impose specific duties of prudence and loyalty on fiduciaries
as Title I does in ERISA section 404(a), it prohibits fiduciaries from
engaging in conflicted transactions on many of the same terms as Title
I.\7\ Under the Reorganization Plan No. 4 of 1978, which Congress
subsequently ratified in 1984,\8\ Congress generally granted the
Department authority to interpret the fiduciary definition and issue
administrative exemptions from the prohibited transaction provisions in
Code section 4975.\9\
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\6\ For purposes of the final rule, the term ``IRA'' is defined
as any account or annuity described in Code section 4975(e)(1)(B)--
(F), and includes individual retirement accounts, individual
retirement annuities, health savings accounts, and certain other
tax-advantaged trusts and plans.
\7\ 26 U.S.C. 4975(c)(1); cf. id. at 4975(f)(5), which defines
``correction'' with respect to prohibited transactions as placing a
plan or an IRA in a financial position not worse than it would have
been in if the person had acted ``under the highest fiduciary
standards.''
\8\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\9\ 5 U.S.C. App. 752 (2018).
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On December 18, 2020, the Department exercised this authority and
adopted PTE 2020-02, a prohibited transaction exemption for investment
advice fiduciaries with respect to employee benefit plans and IRAs.
This exemption ensured that those saving for retirement could have
access to high quality advice by requiring fiduciary advice providers
to render advice that is in their plan and IRA customers' best interest
in order to receive any compensation that would otherwise be prohibited
by ERISA and the Code.
On October 31, 2023, the Department released the proposed
Retirement Security Rule: Definition of an Investment Advice Fiduciary
(the Proposed Rule), along with proposed amendments to administrative
prohibited transaction exemptions available to investment advice
fiduciaries.\10\ The Department designed the Proposed Rule to ensure
that the protections established by Titles I and II of ERISA would
uniformly apply to all investment advice that is provided to
``Retirement Investors'' \11\), concerning the investment of their
retirement assets, and that Retirement Investors' reasonable
expectations are honored when they receive investment advice from
financial professionals who hold themselves out as trusted advice
providers.
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\10\ The proposals were released on the Department's website on
October 31, 2023. They were published in the Federal Register on
November 3, 2023, at 88 FR 75890, 88 FR 75979, 88 FR 76004, and 88
FR 76032.
\11\ As defined in Section V(l), Retirement Investor means a
Plan, Plan participant or beneficiary, IRA, IRA owner or
beneficiary, Plan fiduciary within the meaning of ERISA section
(3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with
respect to the Plan, or IRA fiduciary within the meaning of Code
section 4975(e)(3)(A) or (C) with respect to the IRA.
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At the same time the Department published the Proposed Rule, it
also released the proposed amendment to PTE 2020-02 (the Proposed
Amendment), proposed amendments to PTEs 75-1, 77-4, 80-83, 83-1, and
86-128 that apply to the provision of investment advice (the Mass
Amendment), and proposed amendments to PTE 84-24 and invited
[[Page 32261]]
all interested persons to submit written comments on each.\12\
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\12\ The Proposed Amendment was released on October 31, 2023,
and was published in the Federal Register on November 3, 2023. 88 FR
75979.
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The Department received written comments on the Proposed Amendment,
and on December 12 and 13, 2023, it held a virtual public hearing where
witnesses provided commentary on the Proposed Amendment. After
carefully considering the comments it received and the testimony
presented at the hearing, the Department is granting the final
amendment to PTE 2020-02 that is discussed herein (the Final Amendment)
on its own motion pursuant to its authority under ERISA section 408(a)
and Code section 4975(c)(2) and in accordance with its exemption
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637
(October 27, 2011)).\13\
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\13\ Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 1 (2018))
generally transferred the authority of the Secretary of the Treasury
to grant administrative exemptions under Code section 4975 to the
Secretary of Labor. Procedures Governing the Filing and Processing
of Prohibited Transaction Exemption Applications were amended
effective April 8, 2024 (29 CFR part 2570, subpart B (89 FR 4662
(January 24, 2024)).
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Elsewhere in this edition of the Federal Register, the Department
is finalizing (1) the Proposed Rule defining when a person renders
``investment advice for a fee or other compensation, direct or
indirect'' with respect to any moneys or other property of an employee
benefit plan for purposes of the definition of a ``fiduciary'' in ERISA
section 3(21)(A)(ii) and Code section 4975(e)(3)(B) (the
``Regulation''), (2) the Mass Amendment, and (3) the amendment to PTE
84-24.
Comments and Description of the Amendment to PTE 2020-02
As discussed below, the Department is broadening PTE 2020-02 to
cover more transactions and revising some of the exemption's conditions
to emphasize the core standards underlying the exemption. Consistent
with the Proposed Amendment and PTE 2020-02 as it was originally
granted in December 2020, this Final Amendment ensures that trusted
advisers adhere to fundamental standards of fiduciary conduct when they
receive compensation that otherwise is prohibited by ERISA and the Code
as a result of recommending investment products and services to
Retirement Investors.\14\
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\14\ When using the term ``adviser,'' the Department does not
refer only to investment advisers registered under the Investment
Advisers Act of 1940 or under state law, but rather to any person
rendering fiduciary investment advice under the Regulation. For
example, as used herein, an adviser can be an individual who is,
among other things, a representative of a registered investment
adviser, a bank or similar financial institution, an insurance
company, or a broker-dealer.
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Under these core standards, Financial Institutions \15\ and the
``Investment Professionals'' \16\ who work for them must:
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\15\ As defined in Section V(d) and including registered
investment advisers, banks or similar institutions, insurance
companies, broker-dealers and non-bank trustees.
\16\ As defined in Section V(g)).
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<bullet> acknowledge their fiduciary status \17\ in writing to the
Retirement Investor;
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\17\ For purposes of this disclosure, and throughout the
exemption, the term ``fiduciary status'' is limited to fiduciary
status under Title I of ERISA, the Code, or both. While this
exemption uses some of the same terms that are used in the SEC's
Regulation Best Interest and/or in the Investment Advisers Act and
related interpretive materials issued by the SEC or its staff, the
Department retains interpretive authority with respect to
satisfaction of this exemption.
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<bullet> disclose their services and material conflicts of interest
to the Retirement Investor;
<bullet> adhere to Impartial Conduct Standards requiring them to:
[cir] investigate and evaluate investments, provide advice, and
exercise sound judgment in the same way that knowledgeable and
impartial professionals would in similar circumstances (the Care
Obligation);
[cir] never place their own interests ahead of the Retirement
Investor's interest, or subordinate the Retirement Investor's interests
to their own (the Loyalty Obligation);
[cir] charge no more than reasonable compensation and, if
applicable, comply with Federal securities laws regarding ``best
execution''; and
[cir] avoid making misleading statements about investment
transactions and other relevant matters;
<bullet> adopt firm-level policies and procedures prudently
designed to ensure compliance with the Impartial Conduct Standards and
mitigate conflicts of interest that could otherwise cause violations of
those standards;
<bullet> document and disclose the specific reasons for any
rollover recommendations; and
<bullet> conduct an annual retrospective compliance review.
This Final Amendment builds on the existing conditions and:
<bullet> expands the exemption's scope to include recommendations
of any investment product, regardless of whether the product is sold on
a principal or agency basis;
<bullet> adds non-bank Health Savings Account (HSA) trustees and
custodians to the definition of Financial Institution with respect to
HSAs;
<bullet> revises the disclosure requirements in the Final Amendment
to more closely track other regulators' disclosure requirements with
respect to the provision of investment advice;
<bullet> limits 10-year disqualification to serious misconduct that
has been determined in a court proceeding;
<bullet> provides new streamlined exemption provisions for
Financial Institutions that give fiduciary advice in connection with a
Request for Proposal (RFP) to provide investment management services as
an ERISA section 3(38) investment manager; and
<bullet> makes certain other minor revisions to, and clarifications
of, existing provisions of the exemption.
In addition, although the Department proposed to expand the
recordkeeping requirement in the exemption, the Final Amendment
maintains the recordkeeping provisions already in PTE 2020-02 without
change.
The Final Amendment, which is described in more detail below, is
part of the Department's broader package of changes to the definition
of fiduciary advice and associated exemptions published elsewhere in
today's Federal Register. The Department has worked to ensure that each
separate regulatory action being finalized today, while capable of
operating independently, works together within ERISA's existing
framework. Together, these changes reduce the gap in protections that
previously existed with respect to ERISA-covered investments and level
the playing field for all investment advice fiduciaries. Still, the
amended Regulation and each of the PTEs operate independently and
should continue to do so if any component of the rulemaking is
invalidated.
The Department notes the views of some commenters that it should
have delayed making changes so that Financial Institutions, Investment
Professionals, and the Department could have gained more experience
with PTE 2020-02, as currently written, or that it should even have
foregone making any changes at all in light of new standards of care
imposed on broker-dealers by the Securities and Exchange Commission
(SEC), and on insurance companies and insurance agents by State
insurance regulators. In making changes to PTE 2020-02, however, the
Department has paid close attention to the work of other regulators,
and sought to build upon and complement, rather than disrupt, their
compliance structures. For example, the Department has designed the
Final Amendment in manner that should place Financial Institutions that
have already built robust compliance structures in compliance with the
SEC's
[[Page 32262]]
Regulation Best Interest: the Broker-Dealer Standard of Conduct
(Regulation Best Interest) \18\ in a strong position to comply with the
closely aligned revised conditions of PTE 2020-02.
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\18\ 17 CFR Sec. 240.15l-1.
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The Final Amendment also reflects the Department's ongoing review
of issues of fact, law, and policy related to PTE 2020-02, and more
generally, its regulation of fiduciary investment advice.\19\ Moreover,
the changes described herein reflect the Department's experience
facilitating compliance with PTE 2020-02, consideration of the input it
received from meetings with stakeholders since the exemption originally
was finalized in 2020, and the comments received, and testimony
provided, at the virtual hearing in response to the Proposed Amendment
and the proposed regulation.
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\19\ See Emp. Benefits Sec. Admin. (EBSA), U.S. Dep't of Lab.,
New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment
Advice for Workers & Retirees Frequently Asked Questions (Apr.
2021), (``2021 FAQs''), available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf</a>. ``Q5. Will the Department take
more actions relating to the regulation of fiduciary investment
advice?: The Department is reviewing issues of fact, law, and policy
related to PTE 2020-02, and more generally, its regulation of
fiduciary investment advice. The Department anticipates taking
further regulatory and sub-regulatory actions, as appropriate,
including amending the investment advice fiduciary regulation,
amending PTE 2020-02, and amending or revoking some of the other
existing class exemptions available to investment advice
fiduciaries. Regulatory actions will be preceded by notice and an
opportunity for public comment. Additionally, although future
actions are under consideration to improve the exemption, the
Department believes that core components of PTE 2020-02, including
the Impartial Conduct Standards and the requirement for strong
policies and procedures, are fundamental investor protections which
should not be delayed while the Department considers additional
protections or clarifications.''
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As discussed in greater detail below, the Department has concluded
that, as amended, the exemption is flexible, workable, and provides a
sound and uniform framework for Financial Institutions and Investment
Professionals to provide high quality investment advice to Retirement
Investors. The amended exemption also is broadly available to be relied
on by Financial Institutions and Investment Professionals, without
regard to their business model, fee structure, or type of product
recommended, subject to their compliance with fundamental standards
that protect Retirement Investors. To the extent that Financial
Institutions and Investment Professionals honor terms of the amended
exemption, Retirement Investors will benefit from the application of a
common standard to all fiduciary investment advice recommendations to
Retirement Investors that ensures they will receive prudent and loyal
investment recommendations from Financial Institutions and Investment
Professionals competing on a level playing field that is protective of
Retirement Investors' interests.
Applicability Date
The Final Amendment is applicable to transactions pursuant to
investment advice provided on or after September 23, 2024 (the
``Applicability Date''). For transactions engaged in pursuant to
investment advice recommendations that were provided before the Final
Amendment's Applicability Date, the prior version of PTE 2020-02 will
remain available for all parties that are currently relying on the
exemption.\20\
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\20\ To the extent a party receives ongoing compensation for a
recommendation that was made before the Applicability Date,
including through a systematic purchase payment or trailing
commission, the amended PTE 2020-02 would not apply unless and until
new investment advice is provided.
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Several commenters stated that the Proposed Amendment's
Applicability Date (60-days after publication in the Federal Register)
did not provide sufficient time for Financial Institutions and
Investment Professionals to fully comply with the amended conditions.
In response to these comments, the Department is adding a new Section
VI, which provides a phase-in period for the one-year period beginning
September 23, 2024. Thus, Financial Institutions and Investment
Professionals may receive reasonable compensation under Section I of
the amended exemption during this phase-in period if they comply with
the Impartial Conduct Standards in Section II(a) and the fiduciary
acknowledgment requirement under Section II(b)(1). This one-year phase-
in period is the same as the one-year compliance period the Department
provided when it originally granted PTE 2020-02.
The Department confirms that if a transaction occurred before the
Applicability Date or pursuant to a systematic purchase program
established before the Applicability Date, the restrictions of ERISA
section 406(a)(1)(A), 406(a)(1)(D), and 406(b) and the sanctions
imposed by Code section 4975(a) and (b), by reason of Code section
4975(c)(1)(A), (D), (E) and (F), will not apply to: (1) the receipt,
directly or indirectly, of reasonable compensation by a Financial
Institution, Investment Professional, or any Affiliate and Related
Entity, as such terms are defined in Section V, in connection with
investment advice; or (2) the purchase or sale of an asset in a
principal transaction, and the receipt of a mark-up, mark-down, or
other payment, in either case as a result of the provision of
investment advice within the meaning of ERISA section 3(21)(A)(ii) or
Code section 4975(e)(3)(B) and regulations thereunder. Also, no party
would be required to comply with the amended conditions for a
transaction that occurred before the Applicability Date.
Expanded Exemption Scope
The Department is expanding the scope of PTE 2020-02 in the Final
Amendment to make it more broadly available, as requested by industry
commenters. As amended, the exemption is available for Financial
Institutions and Investment Professionals to receive reasonable
compensation for recommending a broad range of investment products to
Retirement Investors, including insurance and annuity products. Both
the existing exemption and the Proposed Amendment provided narrower
relief. Specifically, Section I(b) of the Proposed Amendment stated:
This exemption permits Financial Institutions and Investment
Professionals, and their Affiliates and Related Entities, to engage
in the following transactions, including as part of a rollover from
a Plan to an IRA as defined in Code section 4975(e)(1)(B) or (C), as
a result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B):
(1) The receipt of reasonable compensation; and
(2) The purchase or sale of an asset in a riskless principal
transaction or a Covered Principal Transaction, and the receipt of a
mark-up, mark-down, or other payment.
Some commenters expressed concern that the scope of covered
transactions in the Proposed Amendment was unduly limited. As support,
some commenters pointed to the Department's proposed simultaneous
repeal of other exemptions covering investment advice and expressed
concern that they would need to rely on PTE 2020-02 or PTE 84-24 for
any compensation for providing investment advice. One commenter noted
that some investment advice fiduciaries that formerly could rely on the
same exemption (e.g., PTE 77-4) for both advice and for other
transactions, such as asset management, would now have to rely on
multiple exemptions. Another commenter suggested that PTE 2020-02 was
not a good substitute for PTE 77-4 because it was more burdensome.
However, as the Department discussed in the preamble to the
[[Page 32263]]
proposed Mass Amendment,\21\ the Department is seeking to provide a
single standard of care that would apply universally to all fiduciary
investment advice, regardless of the specific type of product or advice
provider. This uniform regulatory structure for investment advice will
provide greater protection for Retirement Investors and create a level
playing field among investment advice providers by ensuring that advice
transactions are subject to a common set of standards that are
specifically designed to protect Retirement Investors from the inherent
dangers posed by conflicts of interest and to ensure prudent advice.
These common standards, which are included in both this exemption and
the amended PTE 84-24, importantly include the Impartial Conduct
Standards, the policies and procedures requirement, and the obligation
to conduct annual retrospective reviews, each of which is further
described below. In the Department's judgment, the advice transactions
that were formerly covered by PTE 77-4 and the other exemptions
affected by the Mass Amendment are just as deserving of these core
protections as other advice transactions, and the need for protection
is just as great.
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\21\ 88 FR 76032.
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Several commenters emphasized the need for a universal standard
covering investment advice provided to Retirement Investors. These
commenters described Retirement Investors who reasonably expect their
relationship with an investment advice provider to be one in which they
can--and should--place trust and confidence in the advice provider's
recommendations. In light of the asymmetry of information and knowledge
between a Retirement Investor and an advice provider, commenters noted
that the Retirement Investor is at increased risk that the advice
provider will prioritize its own compensation at the expense of the
Retirement Investor's savings.
To ensure that there is a common standard that Retirement Investors
can rely on for all products and for all tax-advantaged retirement
accounts, the Department is broadening this exemption to make it
available for recommendations of all types of products by all fiduciary
investment advice providers as defined in ERISA, the Code, and the
final Regulation that the Department is issuing today.
Transactions With Parties In Interest
In this Final Amendment, the Department is expanding the scope of
the PTE 2020-02 to permit Financial Institutions, Investment
Professionals, and their Affiliates and Related Entities, to receive
reasonable compensation (including commissions, fees, mark ups, mark
downs, and other payments) that would otherwise be prohibited under
ERISA and the Code as a result of providing investment advice within
the meaning of ERISA section 3(21)(A)(ii), Code section 4975(e)(3)(B),
and the final Regulation to Retirement Investors, including as part of
a rollover from an employee benefit plan to an IRA. This is a change
from the Proposed Amendment, and from the exemption that was finalized
in 2020, which granted limited relief for ``covered principal
transactions'' and ``riskless principal transactions,'' as those terms
were defined in the Proposed Amendment. The Final Amendment provides
exemptive relief for all transactions--regardless of whether they are
executed on a principal or agent basis. This expansion in the scope of
the exemption responds to many commenters' concerns that the Proposed
Amendment unduly narrowed the availability of the exemption, including
the concerns of those who argued that the language in Section I of the
exemption did not sufficiently clarify whether recommendations
involving insurance and annuity products were covered transactions.
This expansion in scope also responds to many industry commenters
who expressed particular concern that the Proposed Amendment of PTE
2020-02 and the proposed Mass Amendment would leave certain principal
transactions that previously were covered by a class exemption without
exemptive relief. Many of these commenters urged the Department to
expand the scope of covered principal transactions in PTE 2020-02,
including to provide relief for closed-end funds that are traded on a
principal basis upon their inception. Some commenters asserted more
generally that the Department was inappropriately substituting its own
judgment for that of Retirement Investors and their fiduciary
investment advice providers and effectively preventing Retirement
Investors from purchasing a wide range of securities that are
recommended.
However, other commenters disagreed. Some commenters urged the
Department to further narrow the scope of Covered Principal
Transactions. For example, one commenter encouraged the Department to
add the limitation ``for cash'' to the definition of Covered Principal
Transaction, which would prevent in-kind transactions from being
treated as covered principal transactions. This commenter asserted that
such a change would reduce the complexity and the conflicts of interest
that otherwise would be associated with such transactions. Other
commenters generally supported the Department's Proposed Amendment with
its limited coverage for principal transactions.
Although the Department is expanding the scope of the exemption,
the Department continues to be concerned about the heightened conflicts
of interest inherent in principal transactions. Principal transactions
involve the purchase from, or sale to, a Plan or an IRA of an
investment on behalf of the Financial Institution's own account or the
account of a person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the Financial Institution. Because an investment advice fiduciary
engaging in a principal transaction is involved with both sides of the
transaction, a Financial Institution or Investment Professional
providing fiduciary investment advice in a principal transaction has a
clear and direct conflict of interest.
In addition, the securities that are typically traded in principal
transactions often lack pre-trade price transparency and can be
illiquid. As a result, Retirement Investors may find it especially
challenging to evaluate the reasonableness of recommended principal
transactions. Because of these challenges, there is a danger that
Financial Institutions and Investment Professionals will favor their
own interests by selling unwanted investments from their inventory to
unwitting investors, overcharge investors, or otherwise take advantage
of investors and put their interests ahead of the investors' interests.
Historically, the Department has provided relief for principal
transactions that is limited in scope and subject to additional
protective conditions because of these concerns.
After careful consideration of the comments, the Department is
expanding the types of transactions that are covered by the exemption
to ensure that Financial Institutions and Investment Professionals can
recommend a wide variety of investment products to Retirement
Investors. To the extent Financial Institutions and Investment
Professionals comply with the stringent standards of care imposed by
the Final Amendment and take seriously the exemption's requirements
relating to policies and procedures, conflict mitigation, and
retrospective review, the Department finds that the Final Amendment is
both protective and flexible enough to accommodate a wide
[[Page 32264]]
range of products, including relatively complex and risky investments.
However, the Department cautions that, in order to comply with the
exemptions' policies and procedures requirements, Financial
Institutions selling products on a principal basis must carefully
address how they will mitigate the inherent conflicts of interest
associated with recommending these products to Retirement Investors.
More generally, Financial Institutions and Investment Professionals
must take special care to protect the interests of Retirement Investors
and to avoid favoring their own financial interests at the expense of
Retirement Investors' interests. The greater the dangers posed by
conflicts of interest, complexity, or risk, the greater the care
Investment Professionals and Financial Institutions must take to ensure
that their investment recommendations are prudent, loyal, and
unaffected by either the Financial Institutions' or the Investment
Professionals' conflicts of interest.
Financial Institutions and Investment Professionals
The amended exemption is broadly available for Financial
Institutions and Investment Professionals, and their Affiliates and
Related Entities, including (but not limited to) independent marketing
organizations (IMOs), field marketing organization (FMOs), brokerage
general agencies (BGAs) and others providing administrative support.
In this Final Amendment, the Department has made some ministerial
changes to the existing definitions of Investment Professionals,
Affiliates and Related Entities for clarity. In particular, the
Department has clarified that the definition of ``Related Entity''
includes two components: (i) a party that has an interest in an
Investment Professional or Financial Institution; and (ii) a party in
which an Investment Professional or Financial Institution has an
interest, in either case when that interest may affect the fiduciary's
best judgment as a fiduciary. The Department has also made ministerial
changes, such as changing ``described'' to ``defined'' in referencing
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B). Some
commenters also suggested other changes in nomenclature, but the
Department has concluded that the terms, as defined in the Final
Amendment, are appropriately clear and consistent.
The Final Amendment also broadens the definition of the term
Financial Institution to include non-bank trustees or custodians that
are approved to serve in these capacities under Treasury Regulation 26
CFR 1.408-2(e) (as amended), but only to the extent they are serving as
non-bank trustees or custodians with respect to HSAs. Several
commenters requested the Department to expand the definition of
Financial Institution under the exemption to include these non-bank
trustees or custodians. As explained by some commenters, IRS-approved
non-bank trustees and custodians are permitted to administer HSAs and
are subject to numerous requirements under regulations and guidance
issued by the Department of the Treasury.\22\ Some commenters stated
that these non-bank trustees service a meaningful portion of the HSA
market, and argued that without eligibility to use PTE 2020-02, they
may be forced to exit the market. According to these commenters, with
reduced competition and fewer choices, costs to HSA plan sponsors and
participants could increase. One commenter further stated that the
failure to include IRS-approved non-bank HSA trustees and custodians in
the definition would be inconsistent with the intent of Congress to
regulate such entities similarly to other Financial Institutions under
ERISA and the Code.
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\22\ According to the commenter, in order for a non-bank trustee
or custodian to receive this certification, the entity must submit a
written application to the Commissioner of the IRS demonstrating,
generally, its ability to act within the accepted rules of fiduciary
conduct, its capacity to account for large numbers of
accountholders, its fitness to handle funds normally associated with
the handling of retirement funds, sufficient net worth, and that its
procedures adhere to established rules of fiduciary conduct
(including that all employees taking part in the performance of the
entity's fiduciary duties are required to be bonded in an amount of
at least $250,000). The entity is also required to undergo an annual
audit of its books and records by a qualified public accountant to
determine, among other things, whether the HSA accounts have been
administered in accordance with applicable law. See Treasury
Regulation 26 CFR 1.408-2(e) (as amended).
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After consideration of these comments, which were limited to
concerns regarding HSAs, the Department is expanding the definition of
Financial Institution in the Final Amendment to include non-bank
trustees and non-bank custodians that are approved under Treasury
Regulation 26 CFR 1.408-2(e) (as amended), but only to the extent they
are serving in these capacities with respect to HSAs. The Department
agrees with commenters that the initial and continuing requirements to
remain certified by the Department of the Treasury as a non-bank
trustee or custodian provide sufficient regulatory oversight of these
entities to include them within the scope of this exemption as applied
to HSAs. As amended, these non-bank trustees and custodians will be
permitted to serve as Financial Institutions under Section V(d)(5). To
implement this change, the Department is redesignating former Section
V(e)(5) to (d)(6), which covers other entities that may become
Financial Institutions under future individual exemptions.
Retirement Investors
The Department is revising the definition of Retirement Investor in
Section V(l) to be consistent with the definition in the final
Regulation defining fiduciary investment advice. As revised, both the
final Regulation and this Final Amendment define Retirement Investor to
mean a Plan, Plan participant or beneficiary, IRA, IRA owner or
beneficiary, Plan fiduciary within the meaning of ERISA section
(3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with
respect to the Plan, or IRA fiduciary within the meaning of Code
section 4975(e)(3)(A) or (C) with respect to the IRA. The preamble to
the final Regulation includes additional discussion of the term
``Retirement Investor,'' which the Department is defining similarly in
the Final Amendment to ensure its broad availability to investment
advice fiduciaries.
These revisions should alleviate some commenters' concerns that
advice providers may provide advisory tools and assistance to
fiduciaries who, in turn, render investment advice to Retirement
Investors. As revised, neither the final Regulation nor this Final
Amendment treats investment advice fiduciaries under section
3(21)(A)(ii) of ERISA or Code section 4975(e)(3)(B) as Retirement
Investors.
Exclusions
The Department is also finalizing its amendment to Section I(c) of
the exemption, which limits the availability of PTE 2020-02 in certain
circumstances. Specifically, section I(c)(1) excludes from the
exemption relief provided to Title I Plans if the Investment
Professional, Financial Institution, or any Affiliate providing the
investment advice is: (A) the employer whose employees are covered by
the Plan; or (B) the Plan's named fiduciary or administrator. However,
a named fiduciary or administrator or their Affiliate (including a
Pooled Plan Provider (PPP) registered with the Department of Labor
under 29 CFR 2510.3-44) may rely on the exemption if it is selected to
provide investment advice by a fiduciary who is
[[Page 32265]]
Independent \23\ of the Financial Institution, Investment Professional,
and their Affiliates. The Department received several comments opposed
to this exclusion, arguing that Financial Institutions should be able
to charge fees for advice to their own employees under the conditions
of the exemption. The Department, however, is not modifying this
provision, because its position continues to be that employers
generally should not use their employees' retirement benefits as a
potential source of revenue or profit, without additional safeguards.
Employers can always render advice and receive reimbursement for their
direct expenses incurred in transactions involving their employees
without the need for the exemptive relief provided in this
exemption.\24\
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\23\ As defined in Section V(e), For purposes of subsection
I(c)(1), a fiduciary is ``Independent'' of the Financial Institution
and Investment Professional if:
(1) the fiduciary is not the Financial Institution, Investment
Professional, or an Affiliate;
(2) the fiduciary does not have a relationship to or an interest
in the Financial Institution, Investment Professional, or any
Affiliate that might affect the exercise of the fiduciary's best
judgment in connection with transactions covered by this exemption;
and
(3) the fiduciary does not receive and is not projected to
receive within its current Federal income tax year, compensation or
other consideration for its own account from the Financial
Institution, Investment Professional, or an Affiliate, in excess of
two (2) percent of the fiduciary's annual revenues based upon its
prior income tax year.
\24\ A few existing prohibited transaction exemptions apply to
employers. See, e.g., ERISA section 408(b)(5) (statutory exemption
that provides relief for the purchase of life insurance, health
insurance, or annuities, from an employer with respect to a Plan or
a wholly owned subsidiary of the employer).
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The Department also has determined that it is inappropriate for PTE
2020-02 to be used by a Financial Institution or Investment
Professional (or an affiliate thereof) that is the named fiduciary or
plan administrator of a Title I Plan to receive additional compensation
for providing investment advice to Retirement Investors who are
participants in the Financial Institution's own Plan unless the
Financial Institution or Investment Professional is selected to serve
as an investment advice provider by a fiduciary that is Independent of
them. Named fiduciaries and plan administrators have significant
authority over plan operations and accordingly, it is imperative for
the Financial Institution or Investment Professional to be selected by
an Independent fiduciary who will monitor and hold them accountable for
their performance as a provider of investment advice services to
Retirement Investors covered by the Financial Institution's own Plan.
Pooled Employer Plans and Pooled Plan Providers
The Proposed Amendment would have been available for advice to
Pooled Employer Plans (PEPs). Amended Section I(c) of the exemption
would have permitted Pooled Plan Providers (PPPs), as defined in
Section V(j), and their Affiliates to rely upon the exemption to
provide investment advice if they are Financial Institutions within the
meaning of the exemption, notwithstanding their status as named
fiduciaries or plan administrators. The preamble to the Proposed
Amendment stated that a PPP can provide investment advice to a PEP
within the framework of the exemption and would allow PEPs to receive
investment advice in the same manner as other ERISA plans.\25\ While
the Proposed Amendment would have created a separate category for PPPs,
the Final Amendment clarifies that PPPs can rely on PTE 2020-02 when
the PPP is selected by an Independent fiduciary. The change ensures
that PPPs are treated in the same manner as any other Financial
Institution.\26\
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\25\ 88 FR at 75982.
\26\ Under ERISA section 3(43)(B)(iii) employers retain
fiduciary responsibility for the selection and monitoring of the PPP
and any other named fiduciary of the plan, and an employer would be
able to make this independent selection.
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Commenters were generally supportive of the proposed approach, but
some expressed concern about fiduciary and prohibited transaction
issues related to a PPP's decision to hire affiliated parties or
employer decisions to participate in a PEP. These issues are outside
the scope of this exemption, because they are dependent on the
particular facts and circumstances of a specific case. Accordingly,
such issues would be better addressed outside the context of the relief
provide in this Final Amendment, which is focused on the receipt of
reasonable compensation as a result of providing investment advice.
Robo-Advice
PTE 2020-02 initially excluded investment advice generated solely
by an interactive website in which computer software-based models or
applications provide investment advice based on investor-supplied
personal information without any personal interaction with or advice
from an Investment Professional (robo-advice). The Proposed Amendment
included robo-advice within the scope of PTE 2020-02. While a few
commenters expressed concern that the Department was favoring robo-
advice, most commenters supported the Department's proposed inclusion.
The commenters asserted that the inclusion would simplify compliance
for Financial Institutions and Investment Professionals and expand
access to investment advice at a lower cost for Retirement Investors.
One commenter argued that by allowing some robo-advice, the Department
was making the exemption available for certain instances of
discretionary investment management, as long as it was not provided by
a human. However, the Department confirms that the exclusion in Section
I(c)(2) limits the exemption to fiduciary investment advice.
After considering these comments, the Department is finalizing this
amendment as proposed to expand the scope of the exemption by removing
Section I(c)(2), which excluded robo-advice from the exemption. As
discussed in the preamble to the Proposed Amendment, the Department
understands that Financial Institutions may use a combination of
computer models and individual Investment Professionals to provide
investment advice and implement a single set of policies and procedures
that governs all investment recommendations. Like any other investment
advice arrangement, Financial Institutions relying on computer models
must satisfy the exemption's Impartial Conduct Standards and other
protective conditions in order to receive exemptive relief. As stated
above, the amended exemption is sufficiently protective and flexible to
accommodate a wide range of investment advice arrangements, including
robo-advice.
Therefore, after reviewing the comments, the Department has not
been presented with any evidence that would lead it to conclude that
robo-advice arrangements cannot comply with the same conditions that
are applicable to other investment advice arrangements. Additionally,
the failure to include such arrangements in the amended exemption could
reduce access to an important and cost-effective means of delivering
investment advice to many participants and beneficiaries. The
Department does not agree with the suggestion of a few commenters that
the inclusion of robo-advice in the exemption would give such
arrangements an unfair competitive advantage, inasmuch as they are
subject to the same conditions as other advisory arrangements under the
terms of the exemption.
[[Page 32266]]
Investment Discretion
The Proposed Amendment would have redesignated Section I(c)(3) of
PTE 2020-02 as Section I(c)(2) to exclude from the exemption investment
advice that is provided to a Retirement Investor by a Financial
Institution or Investment Professional when such Financial Institution
or Investment Professional is serving in a fiduciary capacity other
than as an investment advice fiduciary within the meaning of ERISA
section 3(21)(A)(ii) and Code section 4975(e)(3)(B) (and the
regulations issued thereunder). The Department is finalizing this
provision as proposed. As discussed in the preamble to the Proposed
Amendment, the Department does not intend to change the substance of
this exclusion and is clarifying that Financial Institutions and
Investment Professionals cannot rely on the exemption when they act in
a fiduciary capacity other than as an investment advice fiduciary. The
Department notes that other exemptions exist for other types of
transactions, such as discretionary asset management.
Impartial Conduct Standards
Care Obligation and Loyalty Obligation
The Department is retaining the substance of the exemption's
requirement for Financial Institutions and Investment Professionals to
act in the Retirement Investor's ``Best Interest'' and finalizing
proposed clarifications. However, the Department is replacing the term
``Best Interest'' in the Final Amendment with its two separate
components: the Care Obligation and the Loyalty Obligation. The Final
Amendment specifically refers to each obligation separately, although
they are unchanged in substance from the previous version of PTE 2020-
02 and the Proposed Amendment. Both the Care Obligation and the Loyalty
Obligation must be satisfied when investment advice is provided. As
defined in amended Section V(b), to meet the Care Obligation, advice
must reflect 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 Retirement Investor. As defined in amended Section V(h),
to meet the Loyalty Obligation, the Financial Institution and
Investment Professional must not place the financial or other interests
of the Investment Professional, Financial Institution or any Affiliate,
Related Entity, or other party ahead of the interests of the Retirement
Investor or subordinate the Retirement Investor's interests to those of
the Investment Professional, Financial Institution or any Affiliate,
Related Entity.
The Department is changing its nomenclature for these two
obligations in response to comments that the phrase ``best interest''
was used in many contexts throughout this rulemaking and by various
regulators with possibly different shades of meaning. For example, in
paragraph (c)(1)(i) of the final Regulation, fiduciary status is based,
in part, on whether a recommendation is made under circumstances that
would indicate to a reasonable investor in like circumstances that the
recommendation ``may be relied upon by the retirement investor as
intended to advance the retirement investor's best interest.'' In the
context of the final Regulation, however, ``best interest'' is not
meant to refer to the specific requirements of the ``Best Interest''
standard used in PTE 2020-02, which incorporated ERISA's standards of
prudence and loyalty, but rather to refer more colloquially to
circumstances in which a reasonable investor would believe the advice
provider is looking out for them and working to promote their
interests. As discussed in the preamble to the proposed Amendment, the
Department is also adding an example from the prior PTE 2020-02
preamble to the operative text of Section II(a)(1) specifying that it
is impermissible for the Investment Professional to recommend a product
that is worse for the Retirement Investor because it is better for the
Investment Professional's or the Financial Institution's bottom line.
Similarly, in recommending whether a Retirement Investor should
pursue a particular investment strategy through a brokerage or advisory
account, the Investment Professional must base the recommendation on
the Retirement Investor's financial interests, rather than any
competing financial interests of the Investment Professional. For
example, in order for an Investment Professional to recommend that a
Retirement Investor enter into an arrangement requiring the Retirement
Investor to pay an ongoing advisory fee to the Investment Professional,
the Professional must prudently conclude that the Retirement Investor's
interests would be better served by this arrangement than the payment
of a one-time commission to buy and hold a long-term investment. In
making recommendations as to account type, it is important for the
Investment Professional to ensure that the recommendation carefully
considers the reasonably expected total costs over time to the
Retirement Investor, and that the Investment Professional base its
recommendations on the financial interests of the Retirement Investor
and avoid subordinating those interests to the Investment
Professional's competing financial interests.
It bears emphasis, that this standard should not be read as somehow
foreclosing the Investment Professional and Financial Institution from
being paid on a transactional basis or ongoing basis, nor does it
foreclose investment advice on proprietary products or investments that
generate third-party payments,\27\ or advice based on investment menus
that are limited to such products, in part or whole. Financial
Institutions and Investment Professionals are entitled to receive
reasonable compensation that is fairly disclosed for their work. As
further described below, Financial Institutions that offer a restricted
menu of proprietary products or products that generate third-party
payments must ensure their policies and procedures satisfy the
conditions of Section II(c).
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\27\ The Department considers ``third-party payments'' to
include such payments as sales charges when not paid directly to the
Financial Institution, Investment Professional, or an Affiliate or
Related Entity by a Retirement Investor; gross dealer concessions;
revenue sharing payments; 12b-1 fees; distribution, solicitation or
referral fees; volume-based fees; fees for seminars and educational
programs; and any other compensation, consideration, or financial
benefit provided to the Financial Institution, Investment
Professional or an Affiliate or Related Entity by a third party as a
result of a transaction covered by this exemption involving a
Retirement Investor.
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The Department received many comments on the Impartial Conduct
Standards. Several commenters supported the principles-based approach,
which they asserted provide fundamental investor protections that are
necessary to ensure the advice is in the interest of the Retirement
Investors. Some commenters noted how many investment advice
professionals already hold themselves to similar professional standards
of conduct. One commenter, in particular, stated that these high
standards have not resulted in less access to advice.
Other commenters objected to the Impartial Conduct Standards. Some
commenters argued that the Department does not have authority to
include these conditions in a prohibited transaction exemption.
According to these commenters, because the Care Obligation and Loyalty
Obligation are based on ERISA's prudence and loyalty requirements in
Title I, the Department cannot require these standards to apply
[[Page 32267]]
when advice is provided to an IRA or other Title II Plan. Some
commenters suggested the Department instead rely on the standards
finalized by the SEC or the National Association of Insurance
Commissioners (NAIC). One commenter stated that the Department is
deliberately extending ERISA Title I statutory duties of prudence and
loyalty to brokers and insurance representatives who sell to IRA plans,
although Title II has no such requirements.
The Department disagrees with these commenters. ERISA section
408(a) and Code section 4975(c)(2) expressly permit the Department
(through the Reorganization Plan No. 4 of 1978) to grant ``a
conditional or unconditional exemption'' as long as the exemption is
``(A) administratively feasible, (B) in the interests of the plan and
of its participants and beneficiaries, and (C) protective of the rights
of participants and beneficiaries of the plan.'' \28\ Nothing in these
provisions forbids the Department from drawing on the same common law
standards of prudence and loyalty that have been used in analogous
contexts for hundreds of years, requires the Department to limit
conditions to novel provisions that Congress did not include anywhere
else in ERISA's text, or expresses a preference for including standards
taken from other State or Federal regulatory structures while
disregarding those set forth in ERISA. These standards are an essential
part of ensuring the advice is in the interest of and protective of
Retirement Investors and are also administratively feasible and have
been central to PTE 2020-02 since it was originally granted. In
finalizing the Impartial Conduct Standards in 2020, the Department
explained that this condition ``merely recognizes that fiduciaries of
IRAs, if they seek to use this exemption for relief from prohibited
transactions, should adhere to a best interest standard consistent with
their fiduciary status and a special relationship of trust and
confidence.'' \29\ Additionally, while Title I imposes a duty of care
and a duty of loyalty on fiduciaries in all situations, the concept of
care and loyalty are not unique to Title I or even to ERISA but are
rather foundational principles of trust and agency law. The SEC imposes
duties of care and loyalty on investment advisers and broker-dealers.
The 2020 NAIC Suitability In Annuity Transactions Model Regulation 275
(the ``NAIC Model Regulation'') also relies on underlying principles of
care and loyalty. These core requirements are not singularly reserved
for Title I of ERISA and the Department disagrees that it is
inappropriate to apply these requirements to investment advice
fiduciaries to Title II plans who want to engage in otherwise
statutorily prohibited transactions.
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\28\ ERISA section 408(a), Code section 4975(c)(2).
\29\ 85 FR 82822
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The Department received several comments on how this standard
applies to insurance sales. A few commenters argued that the proposed
revisions to PTE 2020-02 should take a different approach to recognize
the unique aspects of its application to the insurance industry.
Commenters pointed out differences between the NAIC Model Regulation
standard and the exemption's Impartial Conduct Standards. One commenter
accused the Department of ``entrapping insurance agents'' by holding
them to the fiduciary standard based on their actions. However, a
different commenter specifically supported the Department's proposal,
stating that NAIC Model Regulation does not require producers to act in
the ``best interest of their customers,'' and called out the need for a
clear uniform standard.
A few commenters specifically raised questions about the continued
applicability of Question 18 from the 2021 FAQs.\30\ Question 18 asked,
``[h]ow can insurance industry financial institutions comply with the
exemption?'' In response, the Department confirmed that PTE 2020-02 is
available for insurance products, particularly for independent
producers that work with multiple insurance companies. The Department
confirms that the Department's reasoning in the response to FAQ 18
remains true for PTE 2020-02 as amended by the Final Amendment.
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\30\ See supra at note 19.
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The Department is aware that insurance companies often sell
insurance products and fixed (including indexed) annuities through
different distribution channels. While some insurance agents are
employees of an insurance company, other insurance agents are
independent, and work with multiple insurance companies. PTE 2020-02
applies to all of these business models. In addition to PTE 2020-02,
the Department is also simultaneously publishing amendments to PTE 84-
24 elsewhere in this edition of the Federal Register which provide a
pathway to compliance for insurance companies that market their
products through independent insurance agents, without requiring the
companies to assume or acknowledge fiduciary status.
However, insurance companies and agents may also rely upon PTE
2020-02 to the same extent as other Financial Institutions and
Investment Professionals to receive relief for the receipt of otherwise
prohibited compensation as a result of investment recommendations,
including commissions. To the extent an insurance company that markets
its products through independent agents chooses to rely on PTE 2020-02,
the independent insurance agent and the financial institution (i.e.,
the insurance company) must satisfy the exemption's conditions,
including the fiduciary acknowledgement and the Impartial Conduct
Standards with respect to that recommendation. In such cases, the
insurance company must adopt policies and procedures to ensure it
complies with the Impartial Conduct Standards and avoid incentives that
place the insurance company's or the independent agent's interests
ahead of the Retirement Investor's interest.
While independent producers may recommend products issued by a
variety of insurance companies, PTE 2020-02 does not require insurance
companies to exercise supervisory responsibility with respect to
independent producers' sales of the products of unrelated and
unaffiliated insurance companies for which the insurance company does
not receive any compensation or have any financial interest.\31\ When
an insurance company is the supervisory financial institution for
purposes of the exemption with respect to such an independent producer,
its obligation is simply to ensure that the insurer, its affiliates,
and related entities meet the exemption's terms with respect to the
insurance company's annuity which is the subject of the transaction.
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\31\ As defined in PTE 84-24, an Independent Producer is ''a
person or entity that is licensed under the laws of a State to sell,
solicit or negotiate insurance contracts, including annuities, and
that sells to Retirement Investors products of multiple unaffiliated
insurance companies, and (1) is not an employee of an insurance
company (including a statutory employee as defined under Code
section 3121(d)(e)); or (2) is a statutory employee of an insurance
company which has no financial interest int the covered
transaction.''
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Under the exemption, the insurance company must:
<bullet> adopt and implement prudent supervisory and review
mechanisms to safeguard the agent's compliance with the Impartial
Conduct Standards when recommending the insurance company's products;
<bullet> avoid improper incentives to preferentially recommend the
products, riders, and annuity features that are most lucrative for the
insurance company at the customer's expense;
<bullet> ensure that the agent receives no more than reasonable
compensation for its services in connection with the
[[Page 32268]]
transaction (e.g., by monitoring market prices and benchmarks for the
insurance company's products, services, and agent compensation); and
<bullet> adhere to the disclosure and other conditions set forth in
the exemption.
Under the exemption, the obligation of the insurance company with
respect to independent producers is to oversee the recommendation and
sale of its products by the independent producer, not the
recommendations and sales by the independent producer involving another
insurance company's products. Insurance companies could also comply
with the exemption by creating oversight and compliance systems through
contracts with insurance intermediaries such as IMOs, FMOs or BGAs. As
one possible approach, an insurance intermediary could eliminate
compensation incentives across all the insurance companies that work
with the insurance intermediary, assisting each of the insurance
companies with their independent obligations under the exemption. This
might involve the insurance intermediary's review of documentation
prepared by insurance agents to comply with the exemption, as may be
required by the insurance company, or the use of third-party industry
comparisons available in the marketplace to help independent insurance
agents recommend products that are prudent for their retirement
investor customers.
Finally, commenters raised an issue relating to administrative
feasibility of PTE 2020-02 and its core conditions, arguing that it is
too early to determine whether PTE 2020-02, as currently constituted,
is administrable under ERISA section 408(a) and Code section
4975(c)(2), and that the Department has not provided evidence to
evaluate whether it is administrable. Other commenters questioned the
administrative feasibility of both PTE 84-24 and PTE 2020-02 more
generally and took issue with the added or expanded conditions of both
exemptions.
The Department notes, however, that the core conditions of both PTE
2020-02 and PTE 84-24, including all the Impartial Conduct Standards,
reflect core fiduciary obligations that have been present in ERISA
since its passage nearly fifty years ago, and that the duties of care
and loyalty are rooted in trust law obligations that long predate
ERISA. The Department and the financial services industry have decades
of experience with the administration of these requirements and the
Department is confident that Financial Institutions, Insurers and
investment professionals can adopt supervisory structures and make
investment recommendations that meet basic standards of prudence and
loyalty, and that do not involve overcharging or misleading Retirement
Investors.
Moreover, the changes to the exemptions accompany the Regulation,
which makes significant changes to the prior rule on fiduciary
investment advice, and those changes also reflect decades of experience
with the prior rule and its shortcomings in the modern advice
marketplace, as discussed in the preamble to the Regulation. In making
revisions to PTE 2020-02, the Department has been careful to ensure
that parties who are currently relying upon the exemption will be able
to continue to do so, without undue additional burden or needless
change, and many of the changes simply expand the scope of relief
available. In addition, PTE 2020-02 and PTE 84-24 give firms
considerable flexibility in adopting oversight structures to manage
conflicts of interest and promote compliance. The Final Rule and the
exemptions cover many transactions that would not have been treated as
fiduciary advice prior to this rulemaking. Taken together, they fill
gaps in the regulatory structure that were not effectively addressed by
the 1975 rule or PTE 2020-02.
Based on its long experience with the advice rule, the existing
exemption structure, and the core Impartial Conduct Standards, the
Department has concluded that the proposed changes are necessary,
administrable and consistent with the protective standards of ERISA
section 408 and Code section 4975(c)(2). The Department also notes that
similar regulatory efforts have been initiated and successfully
administered by other State and Federal regulators. These regulatory
efforts and structures include New York's Rule 187,\32\ the NAIC Model
Regulation, the SEC's Regulation Best Interest, and the regulation of
advisers under the Investment Advisers Act.
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\32\ Suitability and Best Interest in Life Insurance and Annuity
Transactions, 11 NYCRR 224.
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Reasonable Compensation
The Department is retaining in the Final Amendment the reasonable
compensation and best execution standards from PTE 2020-02 as proposed.
Section II(a)(2)(A) provides that the compensation received, directly
or indirectly, by the Financial Institution, Investment Professional,
their Affiliates and Related Entities for their fiduciary investment
advice services provided to the Retirement Investor must not exceed
reasonable compensation within the meaning of ERISA section 408(b)(2)
and Code section 4975(d)(2). In addition, Section II(a)(2)(B) provides
that the Financial Institution and Investment Professional must seek to
obtain the best execution of the recommended investment transaction
that is reasonably available under the circumstances as required by the
Federal securities laws.
The Department received some comments objecting to the reasonable
compensation standard. Some commenters stated that this standard is not
specific enough and could chill an Investment Professional's
willingness to recommend certain products that carry high commissions.
Other commenters argued that this practice would ultimately limit the
range of products available to Retirement Investors.
The Department is finalizing the reasonable compensation standard
as proposed. The obligation to pay no more than reasonable compensation
to service providers has been part of ERISA since its passage.\33\ For
example, the ERISA section 408(b)(2) and Code section 4975(d)(2)
statutory exemptions expressly require that all types of services
arrangements involving Plans and IRAs result in the service provider
receiving no more than reasonable compensation. When acting as service
providers to Plans or IRAs, Investment Professionals and Financial
Institutions have long been subject to this requirement, regardless of
their fiduciary status.
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\33\ The default rule under common law likewise requires that a
trustee's compensation be reasonable. E.g., Nat'l Assoc. for Fixed
Annuities v. Perez, 217 F. Supp. 3d 1, 43-44 (D.D.C. 2016)
(``[C]ommon law includes requirements of `reasonable compensation'
for trustees . . . .'' (citations omitted)); Restatement (Third) of
Trusts Sec. 38(1) (2003) (``A trustee is entitled to reasonable
compensation out of the trust estate for services as trustee . . .
.'').
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The reasonable compensation standard requires that compensation
received by Financial Institutions and Investment Professionals not be
excessive, as measured by the market value of the particular services,
rights, and benefits the Investment Professional and Financial
Institution are delivering to the Retirement Investor. Given the
conflicts of interest associated with the commissions and other
payments that are covered by the exemption and the potential for self-
dealing, it is particularly important for the Department to require
Investment Professionals' and Financial Institutions' adherence to
these statutory standards, which are rooted in common-law principles.
The reasonable compensation standard applies to all covered
transactions under the exemption,
[[Page 32269]]
including those involving investment products that bundle services and
investment guarantees or other benefits, such as annuity products. In
assessing the reasonableness of compensation in connection with covered
transactions involving these products, it is appropriate to consider
the value of the guarantees and benefits as well as the value of the
services. When assessing the reasonableness of compensation, Financial
Institutions and Investment Professionals generally must consider the
value of all the services and benefits provided to Retirement Investors
for the compensation, not just some of the services and benefits. If
Financial Institutions and Investment Professionals need additional
guidance in this respect, they should refer to the Department's
regulatory interpretations under ERISA section 408(b)(2) and Code
section 4975(d)(2).\34\
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\34\ See 29 CFR 2550.408b-2.
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No Materially Misleading Statements
The Department is also retaining the requirement in Section
II(a)(3) of PTE 2020-02 that prohibits Financial Institutions and
Investment Professionals from making materially misleading statements
to Retirement Investors. The Department is also clarifying that the
prohibition against misleading statements applies to both written and
oral statements. In particular, the Department is also clarifying that
this condition is not satisfied if a Financial Institution or
Investment Professional omits information that is needed to make the
statement not misleading in light of the circumstances under which it
was made.
The Department received a comment expressing concern that this
condition is too vague. The Department disagrees. As the Department
explained when it granted PTE 2020-02, ``materially misleading
statements are properly interpreted to include statements that omit a
material fact necessary in order to make the statements, in light of
the circumstances under which they were made, not misleading.
Retirement Investors are clearly best served by statements and
representations that are free from material misstatements and
omissions.'' \35\ The Final Amendment merely adds clarity by
incorporating this understanding into the exemption's operative text.
Numerous courts have similarly recognized that statements can be
misleading by virtue of material omissions, as well as by affirmative
misstatements.\36\ This is not a unique or new concept for Financial
Institutions. For example, in adopting Regulation Best Interest, the
SEC reminded broker-dealers of their obligations under the anti-fraud
provisions of Federal Securities laws for failure to disclose material
information to their customers when they have a duty to make such
disclosure.\37\ Financial Institutions and Investment Professionals
best promote the interests of Retirement Investors by ensuring that
their communications with their customers are not materially
misleading.
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\35\ 85 FR 82826.
\36\ E.g., Vest v. Resolute FP US Inc., 905 F.3d 985, 990 (6th
Cir. 2018) (``[A] material omission qualifies as misleading
information.''); Kalda v. Sioux Valley Physician Partners, Inc., 481
F.3d 639, 644 (8th Cir. 2007) (``Additionally, a fiduciary has a
duty to inform when it knows that silence may be harmful and cannot
remain silent if it knows or should know that the beneficiary is
laboring under a material misunderstanding of plan benefits.''
(internal citations omitted)); Krohn v. Huron Mem'l Hosp., 173 F.3d
542, 547 (6th Cir. 1999) (``[A] fiduciary breaches its duties by
materially misleading plan participants, regardless of whether the
fiduciary's statements or omissions were made negligently or
intentionally.'') (emphasis added); see Mathews v. Chevron Corp.,
362 F.3d 1172, 1183 (9th Cir. 2004).
\37\ 84 FR 33348, note 303. The Department observes that this
requirement is also consistent with, for example, the requirement
under section 206 of the Advisers Act, which bars an investment
adviser from making materially false or misleading statements or
omissions to any client or prospective client. See In the Matter of
S Squared Tech. Corp., Release No. 1575 (SEC. Release No. Aug. 7,
1996). The SEC's Rule 10b-5 under the Exchange Act imposes a similar
requirement. 17 CFR 240.10b-5(b). See also SEC v. Cap. Gains Rsch.
Bureau, Inc., 375 U.S. 180, 200 (1963) (``Failure to disclose
material facts must be deemed fraud or deceit within its intended
meaning'').
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Accordingly, the Department is finalizing the provisions in the
exemption related to materially misleading statements as proposed, with
minor ministerial changes to the wording, such as moving the phrases
``to the Retirement Investor'' and ``materially misleading'' for
clarity.
Disclosure
The Department is generally finalizing the disclosure conditions
with some modifications to the Proposed Amendment, as discussed below.
While many commenters raised concerns about the burden that would be
imposed on Financial Institutions if the Department required additional
disclosure, others expressed support for the Department to impose
additional disclosure obligations. It is important that Retirement
Investors have a clear understanding of the compensation, services, and
conflicts of interest associated with recommendations if they are to
make fully informed decisions. Additionally, clear and accurate
disclosures can deter Financial Institutions and Investment
Professionals from engaging in otherwise abusive practices that they
would prefer not to expose.
One commenter suggested revising the disclosure condition to
provide that it is sufficient for the Retirement Investor to have
received the disclosure, without necessarily placing the responsibility
squarely on the Financial Institution and Investment Professional to
make the required disclosures. The Department declines to change the
exemption from the proposal in this manner. The Department notes that,
while Financial Institutions can coordinate the transmittal of required
disclosures with others and rely upon vendors and others to ensure
transmittal, ultimately the responsibility to make required
disclosures, including the fiduciary acknowledgement, rests with the
Financial Institution and Investment Professionals as set out in the
exemption. In the Department's view, the proper exercise of this
responsibility is critical to ensuring that Retirement Investors
receive important, accurate, and timely information, and to ensuring
that Financial Institutions and Investment Professionals manage their
fiduciary obligations with the seriousness they deserve.
In the preamble to the Proposed Amendment, the Department requested
comments regarding whether Financial Institutions should be required to
provide additional disclosures on third-party compensation to
Retirement Investors on a publicly available website. One potential
benefit of such disclosure would be to provide information about
conflicts of interest that could be used, not only by Retirement
Investors, but by consultants and intermediaries who could, in turn,
use the information to rate and evaluate various advice providers in
ways that would assist Retirement Investors. Industry commenters
generally opposed the condition, stating that it would impose
significant costs to continuously maintain such a website without a
commensurate benefit to the Retirement Investors.
Based on these comments, the Department has determined not to
include a website disclosure requirement as an exemption condition at
this time. While the Department may reconsider this decision at some
future date based on its experience with the Regulation and related
exemptions, any such future amendments would be subject to public
notice and comment through a formal rulemaking process. Consistent with
the Recordkeeping conditions in Section IV, the Department intends,
however, to
[[Page 32270]]
regularly request that Financial Institutions provide their investor
disclosures to the Department to ensure that they are providing
sufficient information in a manner that the Retirement Investor can
understand, and that the disclosures are serving their intended
purpose.
Fiduciary Acknowledgment
The Department is retaining the requirement in PTE 2020-02 for
Financial Institutions to provide a written acknowledgment of fiduciary
status to the Retirement Investor. At or before the time a covered
transaction (as defined in Section I(b) of the Final Amendment) occurs,
the Financial Institution must provide a written acknowledgment that
the Financial Institution and its Investment Professionals are
providing fiduciary investment advice to the Retirement Investor and
are fiduciaries under Title I of ERISA, Title II of ERISA, or both with
respect to the investment recommendation. Section II(b)(2) also
requires the Financial Institution to provide a written statement of
the Care Obligation and Loyalty Obligation owed by the Investment
Professional and Financial Institution to the Retirement Investor. This
disclosure must also be provided at or before the Financial Institution
engages in the transaction.
The Department received many comments on this requirement. Some
commenters supported clarifications that the acknowledgement must make
clear that the recommendation is rendered in a fiduciary capacity,
though some argued that the acknowledgment should be limited to
specific transactions. For example, one commenter urged the Department
to provide that the fiduciary acknowledgment must be an
``unconditional'' acknowledgment of fiduciary status in order to
effectively address artful drafting by a Financial Institution that is
intended to evade actual fiduciary status. Another commenter provided
examples of disclosures that Financial Institutions have in place that
are misleading to Retirement Investors. Many of these misleading
disclosures state that the Financial Institution has fiduciary status,
but then note there are exceptions or limitations to when the Financial
Institution is acting as a fiduciary, without clearly taking a position
on the Financial Institution's fiduciary status with respect to the
particular recommendation. At best, this drafting may leave the
Retirement Investor with many questions about when they are receiving
fiduciary advice. At worst, it may leave the Retirement Investor with
the mistaken impression that all recommendations it receives are
provided in a fiduciary capacity when only some recommendations are
subject to the protective conditions of this exemption. The Department
agrees with these concerns, which provide further evidence of the need
for the Final Amendment to include an unambiguous written
acknowledgement requirement. Similarly, the requirement for a written
statement of the Care Obligation and Loyalty Obligation is necessary to
provide Retirement Investors with a clear statement of the duties
Financial Institutions owe them.
Several commenters pointed to the history of Financial Institutions
including fine print disclaimers of their fiduciary status. Disclosures
have been used to undermine investors' reasonable expectations and the
purpose of the fiduciary acknowledgment in Section II(b)(1) is to match
the facts to the reasonable expectations of the Retirement Investor.
Under the Final Amendment, Financial Institutions cannot acknowledge
fiduciary status with respect to a recommendation, only to disclaim it
in the fine print. The Final Amendment requires the Financial
Institutions and Investment Professionals to acknowledge their
fiduciary status with respect to the investment recommendation. This
change prevents Financial Institutions from making the fiduciary
acknowledgment and then including exclusions in fine print.
The Department believes that the requirement, as finalized, makes
it unambiguously clear that the recommendation must be acknowledged as
made in a fiduciary capacity under ERISA or the Code. It would not be
sufficient, for example, to have an acknowledgement provide that ``Firm
A acknowledges fiduciary status under ERISA with respect to the
recommendation to the extent the recommendation is treated by ERISA or
Department of Labor regulations as fiduciary'' because that statement
does not explain when a recommendation would be treated as falling
under the fiduciary requirements of ERISA and the Code. In contrast,
the Department's model language below says, ``We are making investment
recommendations to you regarding your retirement plan account or
individual retirement account as fiduciaries within the meaning of
Title I of the Employee Retirement Income Security Act and/or the
Internal Revenue Code, as applicable, which are laws governing
retirement accounts.''
A few commenters noted that neither Regulation Best Interest nor
the NAIC Model Regulation requires a fiduciary acknowledgment. The
Department recognizes that this is a difference between the
requirements of this exemption and other sources of law. The point of
the acknowledgment under PTE 2020-02 is to ensure that both the
fiduciary and the Retirement Investor are clear that the particular
recommendation is in fact made in a fiduciary capacity under ERISA or
the Code, as defined under the regulation. The Retirement Investor
should have no doubt as to the nature of the relationship or the
associated compliance obligations. Anything short of that clear
acknowledgment fails the exemption condition. It is not enough to alert
the Retirement Investor to the fact that there may or may not be
fiduciary obligations in connection with a particular recommendation,
without stating that, in fact, the recommendation is made in the
requisite fiduciary capacity.
Some commenters expressed concern with the timing of the
acknowledgment. These commenters stated that Financial Institutions and
Investment Professionals might have to acknowledge fiduciary status
before they actually receive compensation and know that they are
fiduciaries. Some commenters asked whether this acknowledgment might
itself be a misleading statement that would be impermissible under
Section II(a)(3) of the exemption. To address this concern, the
Department has revised the language in Section II(b)(1) of the Final
Amendment to further clarify that the disclosure must be provided
``[a]t or before the time a covered transaction occurs, as defined in
Section I(b).'' In response to a specific comment, the Department is
further clarifying that, ``[f]or purposes of the disclosures required
by Section II(b)(1)-(4), the Financial Institution or Investment
Professional is deemed to engage in a covered transaction on the later
of (A) the date the recommendation is made or (B) the date the
Financial Institution or Investment Professional becomes entitled to
compensation (whether now or in the future) by reason of making the
recommendation.'' This is revised from the Proposed Amendment, which
would have required the disclosure to acknowledge fiduciary status
``when making an investment recommendation.''
The Department is making these clarifications to confirm that the
Financial Institution does not have to provide a fiduciary
acknowledgment at its first meeting with the Retirement
[[Page 32271]]
Investor. Instead, the fiduciary acknowledgment must be made at or
before the time the covered transaction occurs.
One commenter opined that the fiduciary acknowledgement condition
constitutes ``compelled'' and ``viewpoint-based'' speech in violation
of the First Amendment and warrants application of a `strict scrutiny'
standard of review. As discussed in greater detail in the Regulation,
neither the Regulation nor the Final Amendment prohibits speech based
on content or viewpoint in any capacity. Instead, the Department simply
imposes fiduciary duties on covered parties, and insists on adherence
to Impartial Conduct Standards.
The Department also received many comments regarding whether the
proposed fiduciary acknowledgment and statement of Best Interest
standard amounted to an enforceable contract with the Retirement
Investor to adhere to the requirements of PTE 2020-02. As several
commenters noted, however, PTE 2020-02 does not impose any contract or
warranty requirements on Financial Institutions or Investment
Professionals. Instead, it simply requires up-front clarity about the
nature of the relationship and services being provided. In marked
contrast to the 2016 rulemaking, the Department has imposed no
obligation on Financial Institutions or Investment Professionals to
enter into enforceable contracts with or to provide enforceable
warranties to their customers. The only remedies for violations of the
exemption's conditions, and for engaging in a non-exempt prohibited
transaction, are those provided by Title I of ERISA, which specifically
provides a right of action for fiduciary violations with respect to
ERISA-covered plans, and Title II of ERISA, which provides for
imposition of the excise tax under Code section 4975. Nothing in the
exemption compels Financial Institutions to make contractually
enforceable commitments, and as far as the exemption provides, they
could expressly disclaim any enforcement rights other than those
specifically provided by Title I of ERISA or the Code, without
violating any of the exemption's conditions.
For that reason, arguments that the fiduciary acknowledgment
requirement is inconsistent with the Fifth Circuit's opinion in Chamber
of Commerce v. United States Department of Labor, 885 F.3d 360, 384-85
(5th Cir. 2018) (Chamber) are unsupported. In that case, the Fifth
Circuit faulted the Department for having effectively created a private
cause of action that Congress had not provided.\38\ Under this
exemption the Department does not create new causes of actions, mandate
enforceable contractual commitments, or expand upon the remedial
provisions of ERISA or the Code. Requiring clarity as to the nature of
the services and relationship is a far cry from the creation of a whole
new cause of action or remedial scheme. The Department does not compel
fiduciary status or create new causes of action. It merely conditions
the availability of the exemption, which is only necessary for plan
fiduciaries to receive otherwise prohibited compensation, on Financial
Institutions and Investment Professionals providing clarity that the
transaction, in fact, involves a fiduciary relationship. In addition,
the Department does not purport to bind other State or Federal
regulators in any way or to condition relief on the availability of
remedies under other laws. It no more creates a new cause of action
than any other exemption condition or regulatory requirement that
requires full and fair disclosures of services and fees. Moreover, the
requirement promotes compliance and supports investor choice by
requiring clarity as to the fiduciary nature of the relationship that
the Financial Institution or Investment Professional is undertaking
with the Retirement Investor.
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\38\ Id. at 384-85. But see Nat'l Ass'n for Fixed Annuities v.
Perez, 217 F. Supp. 3d 1, 37 (D.D.C. 2016) (upholding the challenged
provision and noting that ``courts . . . have permitted IRA
participants and beneficiaries to bring state law claims for breach
of contract'' (citing Grund v. Del. Charter Guar. & Tr. Co., 788 F.
Supp. 2d 226, 243-44 (S.D.N.Y. 2011))).
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The Department has a statutory obligation to ensure that any
exemptions from the prohibited transaction provisions are
``administratively feasible,'' ``in the interests of,'' and
``protective'' of the ``rights'' of Retirement Investors. The fiduciary
acknowledgment provides critical support to the Department's ability to
make these findings. The Department notes that conditions requiring
entities to acknowledge their fiduciary status have become commonplace
in recently granted exemptions over the past two years. In this regard,
in 2022 and 2023, the Department granted over a dozen exemptions to
private parties in which an entity was required to acknowledge its
fiduciary status in writing as a requirement for exemptive relief.\39\
Written acknowledgement of fiduciary status was required by the
Department as early as 1984, when the Department published PTE 84-
14,\40\ requiring an entity acting as a ``qualified professional asset
manager'' (a QPAM) to have ``acknowledged in a written management
agreement that it is a fiduciary with respect to each plan that has
retained the QPAM.'' \41\ Fiduciary investment advice providers to IRAs
have always been subject to suit in State courts on State-law theories
of liability, and this rulemaking does not alter this reality. This
rulemaking does not alter the existing framework for bringing suits
under State law against IRA fiduciaries and does not aim to do so.
State regulators remain free to structure legal relationships and
liabilities as they see fit to the extent not inconsistent with Federal
law.
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\39\ See, e.g., PTE 2023-03, Blue Cross and Blue Shield
Association Located in Chicago, Illinois (88 FR 11676, Feb. 23,
2023); PTE 2023-04, Blue Cross and Blue Shield of Arizona, Inc.,
Located in Phoenix, Arizona (88 FR 11679, Feb. 23, 2023); PTE 2023-
05, Blue Cross and Blue Shield of Vermont Located in Berlin, Vermont
(88 FR 11681, Feb. 23, 2023); PTE 2023-06, Hawaii Medical Service
Association Located in Honolulu, Hawaii (FR 88 11684, Feb. 23,
2023); PTE 2023-07, BCS Financial Corporation Located in Oakbrook
Terrace, Illinois (88 FR 11686, Feb. 23, 2023); PTE 2023-08, Blue
Cross and Blue Shield of Mississippi, A Mutual Insurance Company
Located in Flowood, Mississippi (88 FR 11689, Feb. 23, 2023); PTE
2023-09, Blue Cross and Blue Shield of Nebraska, Inc. Located in
Omaha, Nebraska (88 FR 11691, Feb. 23, 2023); PTE 2023-10, BlueCross
BlueShield of Tennessee, Inc. Located in Chattanooga, Tennessee (88
FR 11694, Feb. 23, 2023); PTE 2023-11, Midlands Management
Corporation 401(k) Plan Oklahoma City, OK (88 FR 11696, Feb. 23,
2023); PTE 2023-16, Unit Corporation Employees' Thrift Plan, Located
in Tulsa, Oklahoma (88 FR 45928, July 18, 2023); PTE 2022-02,
Phillips 66 Company Located in Houston, TX (87 FR 23245, Apr. 19,
2022); PTE 2022-03, Comcast Corporation Located in Philadelphia, PA
(87 FR 54264, Sept. 2, 2022); PTE 2022-04, Children's Hospital of
Philadelphia Pension Plan for Union-Represented Employees Located in
Philadelphia, PA. (87 FR 71358, Nov. 22, 2022).
\40\ 49 FR 9494 (March 13, 1984).
\41\ PTE 84-14, Part V, Section (a).
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Model Disclosure
To assist Financial Institutions and Investment Professionals in
complying with these conditions of the exemption, the Department
confirms the following model language will satisfy the disclosure
requirement in Section II(b)(1) and (2):
We are making investment recommendations to you regarding your
retirement plan account or individual retirement account as
fiduciaries within the meaning of Title I of the Employee Retirement
Income Security Act and/or the Internal Revenue Code, as applicable,
which are laws governing retirement accounts. The way we make money
or otherwise are compensated creates some conflicts with your
financial interests, so we operate under a special rule that
requires us to act in your best interest and not put our interest
ahead of yours.
[[Page 32272]]
Under this special rule's provisions, we must:
<bullet> Meet a professional standard of care when making
investment recommendations (give prudent advice) to you;
<bullet> Never put our financial interests ahead of yours when
making recommendations (give loyal advice);
<bullet> Avoid misleading statements about conflicts of interest,
fees, and investments;
<bullet> Follow policies and procedures designed to ensure that we
give advice that is in your best interest;
<bullet> Charge no more than what is reasonable for our services;
and
<bullet> Give you basic information about our conflicts of
interest.
While some commenters requested additional model language, the
Department is not providing a model for the specific disclosures in
Section II(b)(3), (4), and (5) because those disclosures will need to
be tailored to the specific Financial Institution's business model.
Although the model language above broadly applies to all the advice
provider's recommendations, nothing in the exemption would prohibit the
advice provider from limiting its fiduciary acknowledgment to specific
recommendations or classes of recommendations if it was not acting as a
fiduciary in other contexts. The exemption, however, will only cover
recommendations that were subject to such an acknowledgment.
Relationship and Conflict of Interest Disclosure
In response to comments, the Department is amending the disclosure
requirements of PTE 2020-02. As finalized, Section II(b)(3)-(4)
requires the Financial Institution to disclose in writing all material
facts relating to the scope and terms of the relationship with the
Retirement Investor, including:
(3)(A) The material fees and costs that apply to the Retirement
Investor's transactions, holdings, and accounts;
(3)(B) The type and scope of services provided to the Retirement
Investor, including any material limitations on the recommendations
that may be made to them; and
(4) All material facts relating to Conflicts of Interest that are
associated with the recommendation.
This final pre-transaction disclosure is based on the SEC's
Regulation Best Interest disclosure requirements.\42\ The Department
received many comments on the proposed disclosure obligations that
focused, in particular, on differences between the SEC's Regulation
Best Interest disclosures and the Department's proposed PTE 2020-02
disclosures. Some commenters also asserted that the proposed disclosure
requirements of PTE 2020-02 would have imposed a burden on Financial
Institutions without providing sufficient incremental benefits to
Retirement Investors, above and beyond those provided by Regulation
Best Interest. In the view of many commenters, Regulation Best Interest
and the SEC's client relationship summary (also called Form CRS)
already provided sufficient disclosure in the context of securities
recommendations and could serve as the model for a more uniform set of
disclosure requirements applicable to Retirement Investors without as
much additional cost and burden.
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\42\ Similar obligations exist for investment advisers. ``Under
its duty of loyalty, an investment adviser must eliminate or make
full and fair disclosure of all conflicts of interest which might
incline an investment adviser--consciously or unconsciously--to
render advice which is not disinterested such that a client can
provide informed consent to the conflict.'' 2019 Fiduciary
Interpretation (84 FR 33671); see also SEC v. Cap. Gains Rsch.
Bureau, Inc., 375 U.S. at 200 (``the darkness and ignorance of
commercial secrecy are the conditions upon which predatory practices
best thrive'').
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Other commenters expressed support for the Department's proposed
amendments that would have clarified and tightened the existing PTE
2020-02 disclosure requirements. These commenters supported ensuring
that investors have sufficient information to make informed decisions
about the costs of an investment advice transaction and about the
significance and severity of the investment advice fiduciary's
conflicts of interest. Some commenters also supported the proposed
requirement for the disclosures to be written in plain English.
The Department's determination to base the Final Amendment's
disclosure obligations on the SEC's Regulation Best Interest disclosure
obligations is intended to ensure that Retirement Investors receive
critical information that they need to make informed investment
decisions, while reducing compliance burdens by establishing disclosure
requirements that are consistent with the SEC's requirements. This is
also responsive to several comments the Department received that
highlighted disclosure requirements that commenters argued were more
burdensome than the SEC's Regulation Best Interest disclosure
requirements. Although this condition does not specifically require the
disclosure be in ``plain English'' the Department notes the importance
of plain language principles to ensure the Retirement Investors
understand the information they receive.\43\
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\43\ In finalizing Regulation Best Interest, the SEC encouraged
broker-dealers to use plain English in preparing any disclosures
they make. The SEC provided examples such as the use of short
sentences and active voice, and avoidance of legal jargon, highly
technical business terms, or multiple negatives, 84 FR 33368-69.
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Some commenters were particularly concerned about the proposed
requirement that Retirement Investors have the ``right to obtain
specific information regarding costs, fees, and compensation, described
in dollar amounts, percentages, formulas'' upon request based on the
potential burden of such disclosures. Others supported the requirement,
including one commenter stating that such information is necessary for
Retirement Investors to make an informed judgment as to the costs of a
transaction. After consideration of the comments, the Department has
determined that the requirements to disclose material fees, costs,
conflicts of interest, and services should be sufficient to permit the
Retirement Investor to assess both the costs of transactions and the
scope and severity of conflicts, without imposing an additional ``upon
request'' disclosure obligation.
In finalizing these disclosures based on the Regulation Best
Interest disclosure obligation, however, the Department intends to
monitor the effectiveness and utility of the disclosures closely to
ensure they serve their intended purpose and give Retirement Investors
full and fair notice of services, costs, charges, and conflicts of
interest. Based upon its ongoing review of compliance and efficacy, the
Department may revisit the scope and content of the disclosure
obligations as part of future notice and comment rulemaking. At this
time, the Department has concluded the best course of action is to
align the disclosure conditions with the requirements of Regulation
Best Interest, in order to provide a uniform and cost-effective
approach to disclosures, consistent with the Department's statutory
obligation to protect the interests of Retirement Investors.
Rollover Disclosure
The Department has also decided to make revisions to the rollover
disclosure requirements. Under Section II(b)(5), before engaging in or
recommending that a Retirement Investor engage in a rollover from a
Plan that is covered by Title I of ERISA, or making a recommendation to
a Plan participant or beneficiary as to the post-rollover investment of
assets currently held in a
[[Page 32273]]
Plan that is covered by Title I, the Financial Institution and
Investment Professional must consider and document the bases for their
recommendation to engage in the rollover, and must provide that
documentation to the Retirement Investor. Relevant factors to be
considered must include, to the extent applicable, but in any event are
not limited to: (A) the alternatives to a rollover, including leaving
the money in the Plan, if applicable; (B) the fees and expenses
associated with the Plan and the recommended investment or account; (C)
whether an employer or other party pays for some or all of the Plan's
administrative expenses; and (D) the different levels of services and
investments available under the Plan and the recommended investment or
account. The Proposed Amendment specified that this requirement
extended to recommended rollovers from a Plan to another Plan or IRA as
defined in Code section 4975(e)(1)(B) or (C), from an IRA as defined in
Code section 4975(e)(1)(B) or (C) to a Plan, from an IRA to another
IRA, or from one type of account to another (e.g., from a commission-
based account to a fee-based account).
In support of the rollover disclosure provision under the Proposed
Amendment, one commenter highlighted the significance of a rollover
decision and said that a ``careful analysis'' is needed, along with
information about fees, expenses, and other investment options, in
order to provide Retirement Investors with a ``well-supported''
recommendation. Another commenter suggested that the Department add
consideration of a Retirement Investor's Social Security benefits.
Several commenters expressed concerns over the burden of the
rollover documentation and disclosure requirements. Some suggested that
the requirements should be limited to the rollovers from Title I Plans
to IRAs, rather than including IRA-to-IRA or account-to-account
transactions. These commenters argued that the additional requirement
would be of limited value to the Retirement Investors while imposing
significant costs on the Financial Institutions. Commenters requested
that certain types of transactions be excluded, such as those involving
a ``required minimum distribution'' (RMD), an inherited IRA or 401(k)
account, investment education, or IRA-to-IRA transfers. Commenters
suggested Retirement Investors already receive enough information, and
asked if the requirements of this disclosure would be relevant.
The Department continues to believe that the information required
to be included in the rollover disclosure is relevant to Retirement
Investors. A Retirement Investor should understand what they are giving
up in their employer's plan, as well as what they may gain from rolling
over their retirement savings to an IRA. While the Department is not
specifically adding a blanket requirement to document consideration of
a Retirement Investor's Social Security benefit, it also agrees that
the Retirement Investor's Social Security benefit may be an important
component of the overall analysis to ensure any recommendation will
meet the Care Obligation and Loyalty Obligation.
In response to comments about the challenges posed by the
documentation requirements outside the plan context, the Department is
narrowing the required rollover disclosure requirement in Section
II(b)(5) so that it only applies to recommendations to rollovers from
Title I Plans. Under the Final Amendment, PTE 2020-02 no longer will
require disclosures regarding advice for a Retirement Investor to roll
over its account from one IRA to another IRA or to change account type.
The Department is also clarifying the language to confirm that the
disclosure only applies to advice to engage in a rollover
recommendation to a Plan participant or beneficiary as to the post-
rollover investment of assets currently held in a Plan that is covered
by Title I. The rollover disclosure requirement does not apply when a
Financial Institution or Investment Professional does not make a
recommendation, even if it does provide investment education.
The Department received comments expressing concern that the
information required for the rollover disclosure will not be available
to Financial Institutions. A few commenters urged the Department to
address this by requiring plans covered by Title I of ERISA to make
more information publicly available on their Forms 5500. Other
commenters simply stated that Investment Professionals and Financial
Institutions would not be able to comply. As the Department explained
in the preamble to the Proposed Amendment, however, Investment
Professionals and Financial Institutions should make diligent and
prudent efforts to obtain information about the fees, expenses, and
investment options offered in the Retirement Investor's Plan account to
comply with the amended rollover documentation and disclosure
requirement of Section II(b)(5).
As the Department also explained in the preamble to the Proposed
Amendment, the necessary information should be readily available to the
Retirement Investor as a result of Department regulations mandating
disclosure of plan-related information to the Plan's participants and
beneficiaries that is found at 29 CFR 2550.404a-5. If the Retirement
Investor refuses to provide such information, even after a full
explanation of its significance, and the information is not otherwise
readily available, the Financial Institution and Investment
Professional should make a reasonable estimate of a Plan's expenses,
asset values, risk, and returns based on publicly available
information. The Financial Institution and Investment Professional
should document and explain the assumptions used in the estimate and
their limitations. In such cases, the Department confirms that the
Financial Institution and Investment Professional could rely on
alternative data sources, such as the Plan's most recent Form 5500 or
reliable benchmarks on typical fees and expenses for the type and size
of the Plan that holds the Retirement Investor's assets.
Moreover, while the Department is not imposing the same
documentation and disclosure requirements on rollovers from IRA-to-IRA
or from one account type to another, it is not relieving the fiduciary
of its obligation under the Care Obligation and Loyalty Obligation to
make prudent efforts to obtain information about the fees, expenses,
and investment options offered in the different accounts or IRAs. It is
hard to see how a fiduciary can make a prudent and loyal
recommendation, without careful consideration of the financial merits
of the alternative approaches. As the SEC has similarly observed with
respect to Regulation Best Interest, although the Department has not
imposed a specific documentation requirement comparable to the
obligation for Plan to IRA rollovers, it is likely to be difficult for
a firm to demonstrate compliance with its obligations, or to assess the
adequacy of its policies and procedures, without documenting the basis
for such recommendations.\44\
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\44\ See Staff Bulletin: Standards of Conduct for Broker-Dealers
and Investment Advisers Care Obligations, Q16, available at <a href="https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest">https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest</a>.
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Good Faith and Disclosures Prohibited by Law Exceptions
The Department's Proposed Amendment would have added a new Section
II(b)(6), which provides that
[[Page 32274]]
Financial Institutions will not fail to satisfy their disclosure
obligations under Section II(b) solely because they make an error or
omission in disclosing the required information while acting in good
faith and with reasonable diligence. The Financial Institution must
disclose the correct information as soon as practicable, but not later
than 30 days after the date on which it discovers or reasonably should
have discovered the error or omission. Similarly, Section II(b)(7)
allows Investment Professionals and Financial Institutions to rely in
good faith on information and assurances from the other entities that
are not Affiliates as long as they do not know or have reason to know
that such information is incomplete or inaccurate. Under Section
II(b)(8), the Financial Institution is not required to disclose
information pursuant to Section II(b) if such disclosure is otherwise
prohibited by law.
The Department did not receive substantive comments on these
provisions and is finalizing these provisions as proposed.
Policies and Procedures
Under Section II(c), Financial Institutions must establish,
maintain, and enforce written policies and procedures prudently
designed to ensure that the Financial Institution and its Investment
Professionals comply with the Impartial Conduct Standards and other
exemption conditions. The Financial Institution's policies and
procedures must mitigate Conflicts of Interest to the extent that a
reasonable person reviewing the policies and procedures and incentive
practices as a whole would conclude that they do not create an
incentive for a Financial Institution or Investment Professional to
place their interests, or those of any Affiliate or Related Entity,
ahead of the interests of the Retirement Investor. The Department
proposed to amend section II(c) to provide that Financial Institutions
may not use quotas, appraisals, performance or personnel actions,
bonuses, contests, special awards, differential compensation, or other
similar actions or incentives that are intended, or that a reasonable
person would conclude are likely, to result in recommendations that do
not meet the Care Obligation or Loyalty Obligation. In addition, the
Proposed Amendment would require Financial Institutions to provide
their complete policies and procedures to the Department upon request
within 10 business days of request.
The Department received many comments on the proposed amendments to
the policies and procedures. Some of these commenters expressed support
for the Department's clarifications, emphasizing the risks inherent in
conflicted compensation. The Department also received comments in favor
of the proposed requirement that Financial Institutions furnish to the
Department complete policies and procedures within 10 business days,
asserting that such a requirement would be a meaningful incentive for
reasonably designed policies and procedures. Others asserted that the
conditions were unworkable. Some commenters were particularly concerned
about the requirement that Financial Institutions may not use quotas,
appraisals, performance or personnel actions, bonuses, contests,
special awards, differential compensation, or other similar actions or
incentives that are intended, or that a reasonable person would
conclude are likely, to result in recommendations that do not meet the
Care Obligation or Loyalty Obligation.
Some commenters read the Proposed Amendment as banning differential
compensation. One commenter characterized it as an attack on
educational meetings and asserted that it conflicted with Regulation
Best Interest and Financial Industry Regulatory Authority (FINRA)
rules. The Department disagrees with the commenters' characterizations.
The provision neither bans differential compensation, nor prohibits
educational meetings. Although ERISA prohibits conflicted transactions
between a plan and a fiduciary, the Department has granted this
exemption specifically to allow Financial Institutions to receive
compensation that varies based on the products they sell and that
otherwise would be prohibited under ERISA section 406(b) and Code
section 4975(c)(1)(E) and (F). However, in order to do so, the
Financial Institution must pay attention to the conflicts that are
inherent in its compensation system and must take special care to
ensure that it does not create or implement compensation practices that
are intended, or that a reasonable person would conclude are likely, to
result in recommendations that do not meet the Care Obligation or
Loyalty Obligation. Based on the foregoing, the Department is
finalizing Section II(c) as proposed with minor edits made for clarity.
Some commenters argued that the Department should rely on other
regulators' policies and procedures requirements. Other commenters
expressed concern that other regulators are not sufficiently protective
in this area. For example, although the NAIC Model Regulation
technically requires that producers manage material conflicts of
interest, it excludes cash and non-cash compensation from the
definition of material conflicts of interest. Thus, the following forms
of cash compensation are excluded from the NAIC Model Regulation as
sources of conflicts of interest: any discount, concession, fee,
service fee, commission, sales charge, loan, override, or cash benefit
received by a producer in connection with the recommendation or sale of
an annuity from an insurer, intermediary, or directly from the
consumer; and the following types of ``non-cash compensation,'' are
excluded: health insurance, office rent, office support and retirement
benefits. In contrast, the SEC expressly requires investment advisers
and broker-dealers to manage such conflicts, including commissions and
other forms of compensation.\45\ The Department believes that a more
uniform approach is appropriate so that all Retirement Investors are
protected from conflicts of interest, and to ensure that investment
recommendations are driven by the best interest of the Retirement
Investor and not the competing interests of the Investment Professional
in conflicted compensation arrangements, irrespective of the type of
investment product recommended to them (e.g., a fixed indexed annuity
as opposed to a security).
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\45\ Regulation Best Interest explicitly requires that broker-
dealers establish, maintain, and enforce written policies and
procedures reasonably designed to identify and mitigate conflicts of
interest at the associated person level. See generally 84 FR 33318,
33388; see Exchange Act rule 15l-1(a)(2)(iii)(B). With regards to
investment advisers, the SEC has stated that ``an adviser must
eliminate or at least expose through full and fair disclosure all
conflicts of interest which might incline an investment adviser--
consciously or unconsciously--to render advice which was not
disinterested.'' Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, 84 FR 33669, 33671 (July 12, 2019).
The SEC staff has also said, ``[w]hile compensation practices for
financial professionals are an important potential source of
conflicts of interest, the staff reminds firms that mitigating
conflicts associated with these practices is just one aspect of how
firms satisfy their conflict obligations.'' See Staff Bulletin:
Standards of Conduct for Broker-Dealers and Investment Advisers
Conflicts of Interest, available at <a href="https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest">https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest</a>.
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Accordingly, the Department is maintaining the language largely as
proposed. While the Department acknowledges that many firms have
already built protective structures based on SEC's Regulation Best
Interest, the Investment Advisers Act of 1940,\46\ or PTE 2020-02, they
should be able to build or rely upon existing systems of supervision
and compliance to meet their obligations, rather than build whole new
structures, as the SEC
[[Page 32275]]
observed with respect to broker-dealers' implementation of Regulation
Best Interest.\47\ Like the SEC, in adopting the policies and
procedures requirement for conflict management, the Department has
deliberately chosen not to take a highly prescriptive and inflexible
approach. Instead, the Final Amendment permits compliance with policies
and procedures that accommodate a broad range of business models, so
long as they meet the overarching goals of ensuring adherence to the
Care and Loyalty Obligations. The Final Amendment's requirement for
Financial Institutions' policies and procedures to mitigate Conflicts
of Interest is essential for the Department to satisfy its obligations
under ERISA section 408(a) and Code section 4975(c)(2). The policies
and procedures condition provides Financial Institutions with the
flexibility to have different business models based on their specific
business needs, while still ensuring that the fiduciary investment
advice they provide to Retirement Investors meets the Impartial Conduct
Standards.
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\46\ 15 U.S.C. 80b-1 et seq.
\47\ See Regulation Best Interest: The Broker-Dealer Standard of
Conduct, Exchange Act Release No. 86031, 84 FR 33318, 33327 (June 5,
2019) (``Reg BI Adopting Release''). (recognizing that ``some
broker-dealers may rely on existing policies and procedures that
address conflicts through methods such as compliance and supervisory
systems that are consistent with the Conflict of Interest
Obligation'' under Regulation Best Interest).
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The Department believes that Retirement Investors will best be
protected by the objective standard provided under PTE 2020-02, which
provides a strong benchmark for assessing policies and procedures. The
exemption's principles-based standard focuses on whether a reasonable
person would conclude that the Financial Institution's policies and
procedures are likely to result in recommendations that do not meet the
Care Obligation or Loyalty Obligation. This standard is consistent with
Regulation Best Interest and provides an appropriate yardstick for
assessing compliance while lending additional clarity and rigor to the
obligation to manage adverse incentives. In addition, SEC-registered
investment advisers are required to ``adopt and implement written
policies and procedures reasonably designed to prevent violations, by
[the adviser] and [its] supervised persons, of the [Advisers] Act and
the rules that the Commission has adopted under the [Advisers Act].''
\48\ The approach in PTE 2020-02 provides the flexibility necessary for
Financial Institutions to insulate Investment Professionals from
conflicts of interest under the wide array of business and compensation
models followed in today's marketplace.
---------------------------------------------------------------------------
\48\ See Rule 206(4)-7 (17 CFR 275.206(4)-7).
---------------------------------------------------------------------------
The Department understands that many Financial Institutions,
particularly insurance companies, rely on educational conferences, and
stresses that this provision does not prohibit them. The exemption
merely requires reasonable guardrails for conferences, especially if
they involve travel. These conferences must be structured in a manner
that ensures they are not likely to lead Investment Professionals to
make recommendations that do not meet the exemption's Care Obligation
or Loyalty Obligation. In addition, the Department notes that properly
designed incentives that are simply aimed at increasing the overall
amount of retirement saving and investing, without promoting specific
products, would not violate the policies and procedures requirement.
Similarly, notwithstanding contrary language in the preamble to the
Proposed Amendment, the Department recognizes that it can be
appropriate to tie attendance at conferences to sales thresholds in
certain circumstances (for example, insurance companies could not
reasonably be expected to provide training for independent agents who
are not recommending their products).
On the other hand, Financial Institutions must take special care to
ensure that training conferences held in vacation destinations are not
designed to incentivize recommendations that run counter to Retirement
Investor interests. Firms should structure training events to ensure
that they are consistent with the Care and Loyalty Obligations.
Recommendations to Retirement Investors should be driven by the
interests of the investor in a secure retirement. Certainly, Financial
Institutions should avoid creating situations where the training is
merely incidental to the event, and an imprudent recommendation to a
Retirement Investor is the only thing standing between an Investment
Professional and a luxury getaway vacation.
Similarly, the Department does not require Financial Institutions
to categorically eliminate all sales quotas, appraisals, performance or
personnel actions, bonuses, contests, special awards, differential
compensation, sales contests, quotas, or bonuses. Rather, Financial
Institutions are only required to eliminate such incentives that are
``intended, or that a reasonable person would conclude are likely, to
result in recommendations that do not meet the Care Obligation or
Loyalty Obligation.''
While the SEC limited its categorical prohibition on sales contests
to time-limited contests, as one commenter observed, the SEC has
emphasized that the limited prohibition in Regulation Best Interest
should not be read as automatically permitting other activities.
Instead, the SEC stressed that ``prohibiting certain incentives does
not mean that all other incentives are presumptively compliant with
Regulation Best Interest.'' \49\ The SEC noted that ``other incentives
and practices that are not explicitly prohibited are permitted provided
that the broker-dealer establishes reasonably designed policies and
procedures to disclose and mitigate the incentives created, and the
broker-dealer and its associated persons comply with the Care
Obligation and the Disclosure Obligation'' (emphasis added).\50\ In
fact, the SEC recognized that if a ``firm determines that the conflicts
associated with these practices are too difficult to disclose and
mitigate, the firm should consider carefully assessing whether it is
able to satisfy its best interest obligation in light of the identified
conflict and in certain circumstances, may wish to avoid such practice
entirely.'' \51\
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\49\ Reg BI Adopting Release at 33397.
\50\ Id. at 33327.
\51\ Id. at 33397.
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The Department's conflict-mitigation language was not newly
introduced in the Proposed Amendment; it has been part of the
Department's interpretation of PTE 2020-02 since the Department issued
the 2021 FAQs.\52\ For example, in Q16 of the FAQs, the Department
asked what Financial Institutions should do to satisfy the standard of
mitigation so that a reasonable person reviewing their policies and
procedures and incentive practices as a whole would conclude that they
do been not create an incentive for a Financial Institution or
Investment Professional to place their interests ahead of the interest
of the Retirement Investor.
---------------------------------------------------------------------------
\52\ See supra note 19.
---------------------------------------------------------------------------
In the FAQ, the Department wrote that Financial Institutions must
take special care in developing and monitoring compensation systems to
ensure that their Investment Professionals satisfy the fundamental
obligation to provide advice that is in the Retirement Investor's best
interest. By carefully designing their compensation structures,
Financial Institutions can avoid incentive structures that a reasonable
person would view as creating incentives for Investment Professionals
to place their interests ahead of the Retirement
[[Page 32276]]
Investor's interests. Accordingly, Financial Institutions must be
careful not to use quotas, bonuses, prizes, or performance standards as
incentives that a reasonable person would conclude are likely to
encourage Investment Professionals to make recommendations to
Retirement Investors that do not meet the Care Obligation and Loyalty
Obligation of the Final Amendment. The Financial Institution should aim
to eliminate such conflicts to the extent possible, not create them.
The FAQs went on to clarify that the Department recognizes firms
cannot eliminate all conflicts of interest, however, and the exemption
accordingly stresses the importance of mitigating such conflicts. For
example, as one means of compliance, a firm could ensure level
compensation for recommendations to invest in assets that fall within
reasonably defined investment categories, and exercise heightened
supervision as between investment categories to the extent that it is
not possible for the institution to eliminate conflicts of interest
between these categories. In this regard, the Department stresses that
it is not imposing an obligation on firms to eliminate all differential
compensation, but rather to manage any conflicts of interest caused by
such differentials so that the interest of the Retirement Investor is
paramount, rather than misaligned relative to the financial interests
of the Investment Professional or Financial Institution. The Department
also stresses that any transitional efforts to move to other
compensation models or policies and procedures should be careful to
avoid harm to existing investors' holdings. In making recommendations
as to account type, it is important for the Investment Professional to
ensure that the recommendation carefully considers the reasonably
expected total costs over time to the Retirement Investor, and that the
Investment Professional base its recommendations on the financial
interests of the Retirement Investor and avoid subordinating those
interests to the Investment Professional's competing financial
interests. If, for example, a Retirement Investor had previously
invested in front-end load shares, but the Financial Institution
decided to move away from recommending such shares as part of its
effort to better manage Conflicts of Interest, the Financial
Institution and Investment Professional would need to pay close
attention to the Care Obligation and Loyalty Obligation before advising
the Retirement Investor to exchange or liquidate existing holdings in
such shares after having already borne the front-end expense.
Similarly, the Department disagrees with the few commenters who
suggested that the conflict-mitigation requirement would necessarily
prevent Financial Institutions and Investment Professionals from
recommending such specific investments as Class A share mutual fund
investors. One commenter specifically expressed concern that Retirement
Investors may want to pay up front for certain additional rights that
Class A shares can include, such as rights of appreciation (ROA) and/or
rights of exchange (ROE). While the Department is not endorsing any
particular products, the Department confirms that the exemption does
not preclude the recommendation of such shares when the recommendation
satisfies the Care Obligation and Loyalty Obligation for a particular
Retirement Investor.
More generally, Financial Institutions' policies and procedures
must include supervisory oversight of investment recommendations,
particularly in areas in which differential compensation remains. For
example, Financial Institutions' policies and procedures could provide
for increased monitoring of Investment Professional recommendations at
or near compensation thresholds, recommendations at key liquidity
events for investors (e.g., rollovers), and recommendations of
investments that are particularly prone to conflicts of interest, such
as proprietary products and principal-traded assets. However, in many
circumstances, supervisory oversight is not an effective substitute for
meaningful mitigation or elimination of dangerous compensation
incentives. The Department continues to believe that its principles-
based approach to conflict management is the right one. It properly
focuses Financial Institutions on conflict mitigation, recognizes the
practical impossibility of eliminating all conflicts, and stresses
Financial Institutions' fundamental responsibility to ensure that their
policies and procedures for managing conflicts of interest are such
that a reasonable person would conclude that the Financial Institution
is avoiding incentives that are likely to encourage Investment
Professionals to make recommendations to Retirement Investors that do
not meet the Final Amendment's Care Obligation and Loyalty Obligation.
While PTE 2020-02 does not require eliminating all conflicts, it does
require Financial Institutions to take special care when addressing the
conflicts that are present.
Proprietary Products
In the Proposed Amendment, the Department requested comment on
whether it should provide additional guidance regarding when a
Financial Institution or Investment Professional, acting as a
fiduciary, recommends its proprietary products to a Retirement
Investor, and, if so, the type of guidance that would be most useful. A
few commenters asserted that, despite the Department specifically
stating that the exemption allows for investment advice on proprietary
products or investments that generate third-party payments, the
Department's additional guidance undermined that confirmation. One
commenter took the opposite approach, and suggested the Department
prohibit Financial Institutions and Investment Professionals from
receiving third-party payments or require any third-party payments to
be offset or rebated to the Retirement Investor.
The Department is not prohibiting any types of compensation, and
once again confirms that PTE 2020-02 does not preclude Financial
Institutions from providing fiduciary investment advice on proprietary
products or investments that generate third-party payments, or advice
based on investment menus that are limited to such products, in part or
whole. The principles-based nature of the exemption is applicable to
all transactions. The Department further disagrees with comments that
stated the Department imposed additional conditions on proprietary
products. Instead, the Department has provided an example of how
Financial Institutions may choose to comply with the exemption when
recommending such products. The standards established by the exemption
are the same for all Financial Institutions and Investment
Professionals, and firms are given substantial leeway in developing
policies and procedures that suit their business model, provided that
those policies and procedures are crafted in such a way that a
reasonable person reviewing the policies and procedures and incentive
practices as a whole would conclude that they do not create an
incentive for a Financial Institution or Investment Professional to
place their interests ahead of the interests of the Retirement
Investor.
As described in the preamble to the Proposed Amendment, to the
extent a recommendation of proprietary products is fiduciary investment
advice under the Regulation, one way that a Financial Institution could
meet the terms of the Proposed Amendment (and the Final Exemption) is
by prudently doing the following:
[[Page 32277]]
<bullet> Document in writing its limitations on the universe of
recommended investments, the Conflicts of Interest associated with any
contract, agreement, or arrangement providing for its receipt of third-
party payments or associated with the sale or promotion of proprietary
products.
<bullet> Document any services it will provide to Retirement
Investors in exchange for third-party payments, as well as any services
or consideration it will furnish to any other party, including the
payor, in exchange for the third-party payments.
<bullet> Reasonably conclude that the limitations on the universe
of recommended investments and Conflicts of Interest will not cause the
Financial Institution or its Investment Professionals to receive
compensation in excess of reasonable compensation for Retirement
Investors as set forth in Section II(a)(2).
<bullet> Reasonably conclude that these limitations and Conflicts
of Interest will not cause the Financial Institution or its Investment
Professionals to recommend imprudent investments; and document in
writing the bases for its conclusions.
<bullet> Inform the Retirement Investor clearly and prominently in
writing that the Financial Institution limits the types of products
that it and its Investment Professionals recommend to proprietary
products and/or products that generate third-party payments.
[cir] In this regard, the notice should not simply state that the
Financial Institution or Investment Professional ``may'' limit
investment recommendations based on whether the investments are
proprietary products or generate third-party payments, without specific
disclosure of the extent to which recommendations are, in fact, limited
on that basis.
<bullet> Clearly explains its fees, compensation, and associated
Conflicts of Interest to the Retirement Investor in plain language.
<bullet> Ensure that all recommendations are based on the
Investment Professional's considerations of factors or interests such
as investment objectives, risk tolerance, financial circumstances, and
needs of the Retirement Investor.
<bullet> Ensure that, at the time of the recommendation, the amount
of compensation and other consideration reasonably anticipated to be
paid, directly or indirectly, to the Investment Professional, Financial
Institution, or their Affiliates or Related Entities for their services
in connection with the recommended transaction is not in excess of
reasonable compensation within the meaning of ERISA section 408(b)(2)
and Code section 4975(d)(2).
<bullet> Ensure that the Investment Professional's recommendation
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 Retirement Investor; and the Investment Professional's
recommendation is not based on the financial or other interests of the
Investment Professional or the Investment Professional's consideration
of any factors or interests other than the investment objectives, risk
tolerance, financial circumstances, and needs of the Retirement
Investor.
An SEC Staff Bulletin entitled Standards of Conduct for Broker-
Dealers and Investment Advisers Conflicts of Interest additionally
provides guidance on how to manage conflicts to ensure compliance with
obligations of care and conflict management. The SEC staff Bulletin
provides strong guidance on how firms and Investment Professionals can
build policies and procedures properly aligned with the Care and
Loyalty Obligations set forth in the Final Exemption.\53\
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\53\ See supra note 44, Staff Bulletin: Standards of Conduct for
Broker-Dealers and Investment Advisers Conflicts of Interest,
available at <a href="https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest">https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest</a>.
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Providing Policies and Procedures to the Department
The Department proposed Section II(c)(3) would have required
Financial Institutions to provide their complete policies and
procedures to the Department within 10 business days of request. One
commenter expressed support, noting that this condition would provide a
meaningful incentive for Financial Institutions to ensure that policies
and procedures are reasonably designed. Another commenter strongly
urged the Department to eliminate this condition and instead rely on
its subpoena authority, if necessary. One comment requested more time
to provide the certification to the Department. In response to these
comments, although the Department expects that these reports should
already be completed at the time of the request and easily located, it
recognizes the possibility of inadvertent non-compliance because of the
tight timeline and has modified the requirement in the Final Amendment
to give Financial Institutions Insurers 30 days to provide the
documentation.
Retrospective Review
The Department is finalizing the proposed retrospective review
requirement, with some ministerial changes for clarity. Section II(d)
requires the Financial Institution to conduct a retrospective review,
at least annually, that is reasonably designed to detect and prevent
violations of, and achieve compliance with, the conditions of this
exemption's requirements, including adherence to the Impartial Conduct
Standards and establishing and implementing policies and procedures
that govern compliance with the exemption's conditions. The Financial
Institution must update its policies and procedures as business,
regulatory, and legislative changes and events dictate, to ensure that
its policies and procedures remain prudently designed, effective, and
compliant with Section II(c). The methodology and results of the
retrospective review must be reduced to a written report that is
provided to a Senior Executive Officer of the Financial Institution.
Under Section II(d)(3) the Senior Executive Officer must certify
annually that the officer has reviewed the retrospective review report,
that the Financial Institution has filed (or will file timely,
including extensions) Form 5330 reporting any non-exempt prohibited
transactions discovered by the Financial Institution in connection with
investment advice covered under Code section 4975(e)(3)(B), corrected
those transactions, and paid any resulting excise taxes owed under Code
section 4975(a) or (b). The certification must also include that the
Financial Institution has written policies and procedures that meet the
requirements set forth in Section II(c), and that the Financial
Institution has established a prudent process to modify such policies
and procedures as required by Section II(d)(1).
Under Section II(d)(4), the review, report, and certification must
be completed no later than six months after the end of the period
covered by the review. Section II(d)(5) requires that the Financial
Institution retain the report, certification, and supporting data for a
period of six years and make the report, certification, and supporting
data available to the Department within 30 days of request to the
extent permitted by law (including 12 U.S.C. 484 regarding limitations
on visitorial powers for national banks).
The Department received many comments on the retrospective review
conditions. Some commenters
[[Page 32278]]
supported the requirement for Financial Institutions to undertake a
regular process to ensure that their policies and procedures are
reasonably designed to detect and prevent violations of, and achieve
compliance with, the conditions of the exemption.
Other commenters raised concern that the retrospective review
requirement imposes significant burdens on Financial Institutions,
while providing limited benefits to Retirement Investors. One commenter
expressed specific concern that the Department's use of the terms
``effective'' and ``compliant'' are undefined, creating unwarranted
uncertainty for firms.
This condition, as drafted, provides important protections for
Retirement Investors. The obligation to periodically review the
effectiveness of policies and procedures and to determine compliance is
critical to ensuring that they achieve their intended protective
purposes and are not mere window dressing. Without such periodic
assessments, it would be hard for a Financial Institution to have
confidence that its oversight structures are working to ensure
compliance with the Impartial Conduct Standards. By uniformly requiring
retrospective review, the exemption promotes fiduciaries' uniform
compliance with the Impartial Conduct Standards, which is an important
aim of this rulemaking. Furthermore, the Department has provided
guidance on how Financial Institutions can structure their policies and
procedures, which should assist Senior Executive Officers in making the
required certifications.
Several commenters specifically raised concerns with the proposed
requirement that the Financial Institution has filed (or will file
timely, including extensions) Form 5330 reporting any non-exempt
prohibited transactions discovered by the Financial Institution in
connection with investment advice covered under Code section
4975(e)(3)(B), corrected those transactions, and paid any resulting
excise taxes owed under Code section 4975(a) or (b). Some commenters
argued the Department is exceeding the scope of its regulatory
authority by conditioning relief on compliance with certain Code
requirements.
However, the Department notes that it is within its authority to
ensure Financial Institutions engaging in otherwise prohibited
transactions comply with the law, including by paying the excise taxes
owed on non-exempt prohibited transactions. The amended Retrospective
Review requirement is consistent with the Fifth Circuit's reasoning in
Chamber. The Department is not creating new remedies or causes of
action for violations of Title II of ERISA, but merely ensuring that
parties comply with the excise taxes Congress specifically imposed on
such violations. This approach is wholly consistent with the Fifth
Circuit's observation that ``ERISA Title II only punishes violations of
the `prohibited transactions' provision by means of IRS audits and
excise taxes.'' \54\
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\54\ Chamber of Commerce v. U.S. Dep't of Labor, 885 F.3d 360,
384 (5th Cir. 2018). For additional information regarding correcting
prohibited transactions, see Voluntary Fiduciary Correction Program
Under the Employee Retirement Income Security Act of 1974,71 FR
20262 (Apr. 19, 2006).
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One commenter additionally argued this condition overstates the
obligation to file Form 5330 because there is no obligation to file if
a transaction is self-corrected and no excise tax is due. The commenter
misreads the exemption, however. The Department is not imposing any
additional requirements to file Form 5330; rather, it is merely
requiring that transactions that are reportable to the IRS are in fact
reported. The Department notes that while self-correction is permitted,
such correction must be made in a permissible manner and within the
allowable time frame.
One commenter expressed concern about including this obligation as
part of the Senior Executive Officer's certification. The Department
notes, however, that it is the Financial Institution's obligation to
correct the prohibited transaction, file IRS Form 5330, and pay the
prohibited transaction excise tax, and so it is appropriate for the
Senior Executive Officer to include this in the certification. The
Department is including the excise tax requirement in the Final
Amendment as proposed. The excise tax is the congressionally imposed
sanction for engaging in a non-exempt prohibited transaction and
provides a powerful incentive for compliance. Requiring certification
by the Senior Executive Officer reinforces the importance of
compliance, provides an important safeguard for compliance with the tax
obligation when violations occur, and focuses the Institution's
attention on instances where the conditions of this exemption have been
violated, resulting in a non-exempt prohibited transaction.
Another commenter suggested that the Department modify the
conditions to expressly provide that these certifications and other
obligations should be limited to an obligation of good faith and
reasonable diligence in complying with the retrospective review
required under Section II(d) of the Proposed Amendment and good faith
calculation of any excise taxes payable with respect to such prohibited
transactions. The Department is not making the commenter's requested
specific text edits but notes that compliance with the Retrospective
Review requirement of Section II(d) does not require perfection. For
example, Section II(e) specifically allows Financial Institutions to
correct violations that they find as part of their retrospective
review.
Careful retrospective review of the effectiveness of a Financial
Institution's policies and procedures is essential to ensuring
compliance with the Impartial Conduct Standards, and necessary for the
Department to make its statutory findings to grant this exemption. The
review must occur at least annually and must be performed carefully
enough that the Senior Executive Officer can make the required
certification. In this connection, the Department notes that findings
of violations, in litigation or otherwise, do not necessarily mean that
the Financial Institution's policies and procedures are inadequate, or
that its retrospective review was insufficient. While such findings
mean that the specific transaction at issue failed to meet the terms of
the exemption, violated the prohibited transaction rules, and would be
subject to the excise taxes and any available remedies under ERISA, it
does not follow that the Financial Institution's policies and
procedures are necessarily deficient. Rather, such violations should be
reviewed for lessons learned and to determine if broader corrections
are necessary to avoid recurrence. Even strong policies and procedures
cannot be perfectly effective in avoiding isolated violations. Another
commenter expressed concern that the retrospective review is too
focused on the review of the policies and procedures and rather than
impose a new, separate requirement, the Department should rely on other
regulators' retrospective review requirements, or even turn those
requirements into safe harbors. However, such requirements are not
universal, and to the extent other regulators at self-regulatory
organizations, such as FINRA, require retrospective review, the
Financial Institutions would not need to develop whole new systems, but
rather could build upon their existing review system to the extent it
did not already fully satisfy the requirements of this exemption. The
purpose of retrospective review is to assess the compliance of
Financial Institutions and Investment Professionals with the specific
[[Page 32279]]
conditions of this exemption, ERISA, and the Code, as opposed to their
compliance with different regulatory regimes, and to ensure corrective
changes when necessary. These purposes would not be served by relying
entirely on other regulators' review requirements, although the
additional compliance burden should be minimal to the extent firms have
built strong retrospective review procedures pursuant to such
requirements.
Some commenters addressed the requirement that Financial
Institutions provide the retrospective review report, certification,
and supporting data to the Department within 10 business days of
request. One commenter expressed support, noting that this condition
would provide a meaningful incentive for Financial Institutions to
ensure that policies and procedures are reasonably designed. Others
expressed concern. One commenter suggested Financial Institutions
should have 30 days to provide the report, certification, and
supporting data, consistent with the requirement to provide the
Department's policies and procedures upon request. Although the
Department expects that these reports should already be completed at
the time of the request and easily located, it recognizes the
possibility of inadvertent non-compliance because of the tight timeline
and has modified the requirement to give Financial Institutions 30 days
to provide the documentations.
Self-Correction
Section II(e) of the Final Amendment provides that a non-exempt
prohibited transaction will not occur due to a violation of this
exemption's conditions with respect to a covered transaction if the
following requirements are met: (1) either the violation did not result
in investment losses to the Retirement Investor or the Financial
Institution made the Retirement Investor whole for any resulting
losses; (2) the Financial Institution corrects the violation (3) the
correction occurs no later than 90 days after the Financial Institution
learned of the violation or reasonably should have learned of the
violation; and (4) the Financial Institution notifies the person(s)
responsible for conducting the retrospective review during the
applicable review cycle and the violation and correction is
specifically set forth in the written report of the retrospective
review required under subsection II(d)(2). The Department is finalizing
the self-correction provision as proposed, except, in response to
several comments, the Department is removing the requirement to notify
the Department of each violation.
Some commenters questioned the utility of this self-correction
provision to advice providers seeking to comply. One commenter
expressed specific concern that firms will be inclined to relax their
approach to compliance based on the knowledge that, if violations occur
and are detected, they can likely invoke the self-correction process
and avoid sanctions. Another commenter requested clarification
regarding how a Financial Institution would make a Retirement Investor
whole for any resulting losses related to a violation of the conditions
of the exemption. For example, if a condition has been violated and a
rollover occurred, how would a Retirement Investor be made whole? In
response to these comments, the Department notes that Financial
Institutions are not required to use the self-correction provision.
However, if a Financial Institution chooses to self-correct, it must
make the Retirement Investor whole for any and all resulting losses. If
a rollover recommendation out of a Title I Plan cannot be undone, the
Financial Institution should calculate the amount of resulting losses,
including estimated investment and tax losses, and restore the
Retirement Investor to the position they would have occupied but for
the breach.
Some commenters raised concerns about the lack of a materiality
threshold, and the requirement that all mistakes be reported and
remediated, no matter how minor or inadvertent. In the Department's
view, however, the self-correction provisions are measured and
proportional to the nature of the injury. They simply require timely
correction of the violation of the law and notice to the person
responsible for retrospective review of the violation, so that the
significance and materiality of the violation can be assessed by the
appropriate person responsible for assessing the effectiveness of the
firm's compliance oversight. In addition, to address commenters'
concern about the burden associated with the self-correction provision,
the Department deleted the requirement to report each correction to the
Department in this Final Amendment. This change should ease the
compliance burden. Furthermore, to the extent Financial Institutions
would have been wary of utilizing the self-correction provision because
they would have to report each self-correction to the Department, they
should feel more comfortable correcting each violation they find that
is eligible for self-correction after this modification. The Department
notes, however, that it retains the authority to require Financial
Institutions to provide evidence of self-corrections as part of its
investigation program through the recordkeeping provisions in Section
IV.
ERISA Section 3(38) Investment Managers
Several commenters requested broad exceptions to the exemption for
investment advice that is provided to sophisticated investors or from
advice providers that receive level compensation. The Department is not
granting that sort of exception to the general conditions of PTE 2020-
02. As discussed above, the amended exemption is broad and flexible and
provides Financial Institutions with the flexibility to develop
policies and procedures would allow a reasonable person reviewing its
incentive practices as a whole to conclude that they do not create an
incentive for a Financial Institution or Investment Professional to
place their interests ahead of the Retirement Investors' interests.
Financial Institutions that provide fiduciary investment advice can
determine for themselves how they will comply with all the conditions
of the exemption.
Several commenters asked the Department to clarify whether they
would become fiduciaries when marketing their services, and
specifically whether responding to a request for proposal (RFP) to
provide ongoing services as a fiduciary under ERISA section 3(38) would
count as providing fiduciary investment advice if the other provisions
of the Regulation are satisfied. The Department discussed in the
preamble to the Regulation that merely touting the quality of, and
providing information about, one's own advisory or management services
would not be a covered recommendation (as defined in paragraph (f)(10)
of the Regulation) that could lead to fiduciary status. However, to the
extent a covered recommendation is made as part of hiring
communications, it would be evaluated under all the parts of the
Regulation.
A few commenters on the Proposed Amendment expressed concern that
if providing a covered recommendation in the context of an RFP could
lead to fiduciary status, they might need to comply with PTE 2020-02
merely to get hired, which they believed was unduly burdensome. In this
regard, if a covered recommendation is made as part of an RFP process
and all parts of the Regulation are satisfied, including the receipt of
a ``fee or other compensation, direct or indirect,'' as a result of the
fiduciary investment advice provided in
[[Page 32280]]
the context of the RFP, a prohibited transaction would occur.
In response to these comments, the Department added a new section
II(f) to the Final Amendment. The provision states that to the extent a
Financial Institution or Investment Professional provides fiduciary
investment advice to a Retirement Investor as part of its response to
an RFP to provide investment management services as an ERISA section
3(38) investment manager and subsequently is hired to act as an
investment manager to the Retirement Investor, it may receive
compensation as a result of the advice under this exemption if it
complies solely with the Impartial Conduct Standards set forth in
Section II(a).
ERISA Section 3(38) investment managers are fiduciaries because by
definition they must have the power to manage, acquire, or dispose of a
plan's assets, and they are required by statute to acknowledge their
fiduciary status. To respond to the concern expressed by the
commenters, the Department has determined that parties that are
ultimately hired to provide investment management services pursuant to
an RFP should be able to rely on this exemption for the provision of
investment advice in the hiring process as long as they comply with the
Impartial Conduct Standards. The Department notes that ERISA 3(38)
investment managers have discretion with respect to the investment of
plan assets; therefore, they could not rely on PTE 2020-02 for the
ongoing provision of investment management services after they are
hired. Section II(f) is limited to the prohibited transaction
associated with providing fiduciary investment advice in connection
with the hiring process and does not relieve the investment manager
from its obligation to refrain from engaging in any non-exempt
prohibited transactions in the ongoing performance of its activities as
an investment manager.
Eligibility
The Department proposed to modify the eligibility provisions in
Section III, which identify circumstances under which an Investment
Professional or Financial Institution will become ineligible to rely on
the exemption for a 10-year period. The Department proposed expanding
ineligibility to include Financial Institutions that are Affiliates,
rather than members of the more limited ``Controlled Group'' as defined
in PTE 2020-02, and the Proposed Amendment also enumerated specific
crimes (including foreign crimes) that could cause ineligibility in
Section III(a). The Department also proposed to broaden the scope of
the crimes that would have caused ineligibility by providing that a
Financial Institution or Investment Professional becomes ineligible
upon conviction of any of the specific enumerated crimes including
foreign crimes, regardless of the underlying conduct, as opposed to
only ``crimes arising out of such person's provision of investment
advice to Retirement Investors'' as provided in PTE 2020-02.
In the Proposed Amendment, the Department also proposed to add new
ineligibility triggers that would make a Financial Institution or
Investment Professional ineligible to rely on the exemption due to a
systematic pattern or practice of failing to correct prohibited
transactions, report those transactions to the IRS on Form 5330 and pay
the resulting excise taxes imposed by Code section 4975 in connection
with non-exempt prohibited transactions involving investment advice
under Code section 4975(e)(3)(B).
The Department also proposed making clarifying changes to the
timing of the ineligibility provision that is set forth in Section
III(b). The Department proposed that all entities would have become
ineligible six months after the conviction date, the date the
Department issued a written determination regarding a foreign
conviction, or the date the Department issued a written ineligibility
notice regarding other misconduct. As proposed, this six-month period
would have replaced the one-year winding down period (referred to as
the Transition Period in this Final Amendment). Furthermore, the
Department clarified in the Proposed Amendment that ineligibility
remains in effect until the occurrence of the earliest of the following
events: (A) a subsequent judgment reversing a person's conviction, (B)
10 years after the person became ineligible or is released from
imprisonment, if later, or (C) the Department grants an individual
exemption permitting reliance on this exemption, notwithstanding the
conviction.
The Department also proposed changes to Section III(c), which
provided an opportunity to be heard. These proposed changes would have
removed the separate opportunity to be heard by the Department that
would have been granted following conviction by a U.S. Federal or State
court and proposed providing an opportunity to be heard when the
conviction is by a foreign court pursuant to proposed Section
III(c)(1).
Section III(c)(2) of the Proposed Amendment provided that the
Department would have issued a written warning letter regarding the
conduct and thereafter would have allowed Financial Institutions and
Investment Professionals that have engaged in conduct described in
proposed Section III(a)(2) to have had the opportunity to cure the
behavior and to be heard in an evidentiary hearing by the Department.
Following the proposed hearing, the Department would have decided
whether to issue a written ineligibility notice for conduct described
in proposed Section III(a)(2).
Lastly, the Department proposed adding the heading ``Alternative
exemptions'' in Section III(d), which is now Section III(c) in this
Final Amendment, that would have described how a Financial Institution
may continue business after becoming ineligible. The Final Amendment
specifies that a Financial Institution or Investment Professional that
is ineligible to rely on this exemption may rely on an existing
statutory or separate class prohibited transaction exemption if one is
available or may request an individual prohibited transaction exemption
from the Department. Several commenters asserted that the proposed
changes to the eligibility provisions of the exemption would have:
greatly altered the ability of fiduciaries to reasonably rely on PTE
2020-02; substantially broadened the conditions under which a fiduciary
would be ineligible for reliance on PTE 2020-02; resulted in reduced
choice and access for Retirement Investors; caused market disruption;
been punitive; and provided the Department with the sole ability, for
which it lacks the authority, to make Financial Institutions and
Investment Professionals ineligible from providing fiduciary investment
advice. A few commenters pointed to the Department's experience with
ineligibility under PTE 84-14 Section I(g), though some argued that the
Department did not sufficiently analyze the difference between the
parties affected by PTE 84-14 and retail investors receiving investment
advice. A few commenters argued the ineligibility provisions exceeded
the Department's authority. One commenter claimed that Congress did not
intend for the Department to have this degree of power. Another claimed
the Department was granting to itself the ability to impose a ``death
penalty'' on Financial Institutions. Generally, commenters requested
that the Department not finalize the proposed amendments to the
ineligibility provision; alternatively, they requested that the
Department apply the changes only prospectively if
[[Page 32281]]
the Department moves forward with them.
As explained further below, the Department continues to believe
these eligibility provisions ensure that Financial Institutions provide
strong oversight of Investment Professionals and that both the
Financial Institution and the Investment Professional can be expected
to ensure compliance with the exemption. Because of its supervisory
responsibilities, and its control over the design and implementation of
the policies and procedures, the Financial Institution's commitment to
compliance is critical to the success of this exemption. While an
occasional violation of the exemption will not result in
disqualification for 10 years, Section III helps ensure that the
Financial Institutions and Investment Professionals are willing and
able to comply with the conditions of this exemption and protect
investors from misconduct.
As required by ERISA section 408(a) and Code section 4975(c)(2),
the Department may only grant exemptions that are protective of and in
the interests of plan participants and beneficiaries. As the Department
explained when it originally granted PTE 2020-02, ``[t]he Department
has determined that limiting eligibility in this manner serves as an
important safeguard in connection with this very broad grant of relief
from the self-dealing prohibitions of ERISA and the Code in this
exemption.'' \55\ Therefore, after consideration of the comments the
Department has determined to retain the eligibility provision of
Section III with several important modifications discussed below.
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\55\ 85 FR 82841
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Scope of Ineligibility
Several commenters claimed the Proposed Amendment's expansion of
the conditions for ineligibility to encompass not only the fiduciary
but also any affiliate regardless of that affiliate's relationship with
the fiduciary or its activity is regulatory overreach by the Department
that unnecessarily exposes every fiduciary to an additional compliance
risk. Some commenters argued that the exemption's definition of the
term ``Affiliate'' is overly broad and creates an unreasonably large
network of persons, most of whom will have absolutely no connection to
the recommendations provided to Retirement Investors. These commenters
were concerned that the actions of these Affiliates can cause
ineligibility and drive financial services workers and companies out of
business to the detriment of the Retirement Investors relying on their
investment advice services. Other commenters stated that the proposed
expansion of the scope of the ineligibility provisions is problematic
and would have led to unintended consequences.
Some commenters additionally stated the ineligibility provisions
lack a proper nexus between the circumstances of the offense and the
fiduciary services performed for the affected plans and requested the
Department to concentrate the determination for ineligibility
exclusively on the activities of the fiduciary itself and on any entity
that is controlled by the fiduciary. Some commenters requested that the
Department use the term ``Control Group'' in the ineligibility
provisions of the Final Amendment, because it is less confusing and
more well-defined than the term ``Affiliate.'' Another commenter
recommended that the eligibility provisions focus on criminal conduct
that involves the investment management of retirement assets and which
exclusively involves (i) the fiduciary and (ii) any affiliate that the
fiduciary controls or over which the fiduciary exercises a controlling
influence. One commenter provided specific examples of how broadly
``Affiliate'' could be interpreted.
One commenter claimed that the Department has not expressed any
justification for imposing ineligibility when an investment advice
entity's affiliate is convicted of a crime unrelated to the
transactions covered by the exemption. This commenter stated that ERISA
section 411 does not impute convictions to affiliates or relatives and
only provides for the disqualification of persons convicted of
specified crimes from serving as a ``fiduciary'' or as a ``consultant
or adviser to an employee benefit plan, including but not limited to
any entity whose activities are in whole or substantial part devoted to
providing goods or services to any employee benefit plan.''
After consideration of these comments, the Department has
determined to return to the use of the term ``Controlled Group'' in the
Final Amendment for purposes of determining ineligibility under the
exemption and has revised Section III(a) accordingly. The Final
Amendment also adds Section III(a)(3) to the exemption, which defines
Controlled Group by stating that an entity is in the same Controlled
Group as a Financial Institution if the entity (including any
predecessor or successor to the entity) would be considered to be in
the same ``controlled group of corporations'' as the Financial
Institution or ``under common control'' with the Financial Institution
as those terms are defined in Code section 414(b) and (c) (and any
regulations issued thereunder).
However, the Department is retaining in the Final Amendment the
proposed broader definition of crimes that cause ineligibility, because
the Department remains concerned that the limitation of ``arising out
of . . . provision of investment advice'' is too narrow. The crimes
listed as disqualifying are extraordinarily serious. Implicit in some
of the comments is the notion that the Department and Retirement
Investors need not be concerned about serious crimes if they involved
non-plan assets or non-advisory financial activities, such as asset
management. In the Department's view, however, the commission of a
serious crime, such as a felony involving embezzlement, price fixing,
or criminal fraud, calls into question the parties' commitment to
compliance with the law, loyalty to their customers, and insistence on
appropriate oversight structures. In such circumstances, it would be
imprudent for the Department to disregard the previous felonies on the
basis that the crimes were aimed at another class of customers or
parties. When Financial Institutions and Investment Professionals
engage in such crimes, there is ample cause for concern, and little
reason for either the Department or the Retirement Investor to be
sanguine about future compliance with the terms of the exemption. In
such circumstances, it is appropriate to insist that the parties seek
an individual exemption at that point, which permits the Department to
consider the specific facts of the crime, the possible need for
additional exemption conditions, or the loss of the exemption, without
grant of a new individual exemption.
Foreign Convictions
Several commenters claimed that the Department has no basis for
expanding the ineligibility provisions to include conduct by foreign
affiliates and that including foreign affiliates is overbroad and will
create unintended consequences, especially because the conduct that
could lead to ineligibility does not need to relate directly to the
provision of investment advice. These commenters claimed that
disqualification would occur even where the only connection between the
investment advice entity and the entity convicted of a foreign crime is
a small, indirect ownership interest. The commenters stated that
ineligibility will occur for conduct that is completely unrelated to
the provision of fiduciary investment advice and for conduct in
[[Page 32282]]
which the fiduciary has not participated and about which it has no
knowledge. One commenter asserted that a Financial Institution should
not be disqualified for foreign activities unless such activities are
convictions for disqualifying crimes under ERISA section 411.
Several commenters focused on the inclusion of foreign crimes and
stated that the proposed changes to the ineligibility provisions raise
serious questions of fairness, national security, and U.S. sovereignty.
These commenters claimed that ineligibility could result from the
conviction of an affiliate in a foreign court for violation of foreign
law without due process protections or the same level of due process
afforded in the United States. Some commenters expressed concern that
the proposed change sets up a false equivalence between and among
foreign jurisdictions and that it is not credible to assume that the
judicial systems of certain countries will be impartial and have
criminal procedures and due process safeguards as afforded in U.S.
Federal and State courts. Some commenters stated that it is not clear
that the Department is equipped to make the ``substantially
equivalent'' determination and could result in inconsistency and
unfairness as well as, in some cases, a lack of due process. One
commenter agreed that investment transactions that include retirement
assets are increasingly likely to involve entities that may reside or
operate in jurisdictions outside the U.S. and that reliance on PTE
2020-02 therefore must appropriately be tailored to address criminal
activity, whether occurring in the U.S. or in a foreign jurisdiction
but this commenter nonetheless had concerns with the potential lack of
due process in foreign jurisdictions.
Other commenters were concerned that some foreign courts could
become vehicles for hostile governments to achieve political ends as
opposed to dispensing justice and potentially hostile foreign
governments could interfere in the retirement marketplace for supposed
wrongdoing that is wholly unrelated to managing retirement assets and
these governments could potentially assert political influence over
fiduciary advice providers that want to avoid a criminal conviction.
One commenter recommended that the Proposed Amendment's foreign crime
``substantially equivalent'' standard be amended so that ineligibility
for a foreign criminal conviction applies only when the factual record
of such conviction, when applied to United States Federal criminal law,
would highly likely lead also to a criminal conviction in the U.S., as
determined under appropriate regulatory authority by the Department's
Office of the Solicitor.
The Department notes these commenters' concerns, and as noted
above, has reduced the scope of any possible disqualification by
limiting the provision to the Controlled Group. However, the Department
is retaining the inclusion of foreign convictions in the Final
Amendment. Financial Institutions increasingly have a global reach, in
their affiliations and in their investment transactions. Retirement
assets are often involved in transactions that take place in entities
that operate in foreign jurisdictions therefore making the criminal
conduct of foreign entities relevant to eligibility under PTE 2020-02.
An ineligibility provision that is limited to U.S. Federal and State
convictions would ignore these realities and provide insufficient
protection for Retirement Investors. Moreover, foreign crimes of the
type enumerated in the exemption call into question a firm's culture of
compliance just as much as domestic crimes and are signs of potential
serious compliance and integrity failures, whether prosecuted
domestically or in foreign jurisdictions.
The Department does not expect that questions regarding
``substantially equivalent'' will arise frequently, and even less so
with the Final Amendment's use of the term ``Controlled Group'' instead
of ``Affiliate,'' as discussed above. But, when these questions do
arise, impacted entities may contact the Office of Exemption
Determinations for guidance, as they have done for many years in
connection with the eligibility provisions under the QPAM Exemption,
PTE 84-14.\56\ As discussed in more detail below, the one-year
Transition Period that has been added to the exemption and the ability
to apply for an individual exemption provide affected parties with both
the time and the opportunity to address with the Department any issues
about the relevance of any specific foreign conviction and its
applicability to ongoing relief pursuant to PTE 2020-02. Financial
Institutions and Investment Professionals should interpret the scope of
the eligibility provision broadly with respect to foreign convictions
and consistent with the Department's statutorily mandated focus on the
protection of Plans in ERISA section 408(a) and Code section
4975(c)(2). In situations where a crime raises particularly unique
issues related to the substantial equivalence of the foreign Criminal
Conviction, the Financial Institutions and Investment Professionals may
seek the Department's views regarding whether the foreign crime,
conviction, or misconduct is substantially equivalent to a U.S. Federal
or State crime. However, any Financial Institution and Investment
Professional submitting a request for review should do so promptly, and
whenever possible, before a judgment is entered in a foreign
conviction.
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\56\ PTE 84-14 contains a similar eligibility provision which
has long been understood to include foreign convictions. Impacted
parties have successfully sought OED guidance regarding this
eligibility provision whenever individualized questions or concerns
arise. See, e.g., Prohibited Transaction Exemption (PTE) 2023-15, 88
FR 42953 (July 5, 2023); 2023-14, 88 FR 36337 (June 2, 2023); 2023-
13, 88 FR 26336 (Apr. 28, 2023); 2023-02, 88 FR 4023 (Jan. 23,
2023); 2023-01, 88 FR 1418 (Jan. 10, 2023); 2022-01, 87 FR 23249
(Apr. 19, 2022); 2021-01, 86 FR 20410 (Apr. 19, 2021); 2020-01, 85
FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019);
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE
2004-13, 69 FR 54812 (Sept. 10, 2004).
---------------------------------------------------------------------------
In the context of the PTE 84-14 Qualified Professional Asset
Manager (QPAM) exemption, which has similar disqualification
provisions, the Department is not aware of any potentially
disqualifying foreign convictions having occurred in foreign nations
that are intended to harm U.S.-based Financial Institutions and
believes the likelihood of such an occurrence is rare. Further, the
types of foreign crimes of which the Department is aware from recent
PTE 84-14 QPAM individual exemption requests for relief from
convictions have consistently related to the subject Financial
Institution's management of financial transactions and/or culture of
compliance. The underlying foreign crimes in those individual exemption
requests have included: aiding and abetting tax fraud in France (PTE
2016-10, 81 FR 75147 (October 28, 2016) corrected at 88 FR 85931
(December 11, 2023), and PTE 2016-11, 81 FR 75150 (October 28, 2016)
corrected at 89 FR 23612 (April 4, 2024)); attempting to peg, fix, or
stabilize the price of an equity in anticipation of a block offering in
Japan (PTE 2023-13, 88 FR 26336 (April 28, 2023)); illicit solicitation
and money laundering for the purposes of aiding tax evasion in France
(PTE 2019-01, 84 FR 6163 (February 26, 2019)); and spot/futures-linked
market price manipulation in South Korea (PTE 2015-15, 80 FR 53574
(September 4, 2015)).\57\
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\57\ On December 12, 2018, Korea's Seoul High Court for the 7th
Criminal Division (the Seoul High Court) reversed the Korean Court's
decision and declared the defendants not guilty; subsequently,
Korean prosecutors appealed the Seoul High Court's decision to the
Supreme Court of Korea., On December 21, 2023, the Supreme Court of
Korea affirmed the reversal of the Korean Conviction, and it
dismissed all judicial proceedings against DSK.
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[[Page 32283]]
However, to address the concern expressed in the public comments
that convictions have occurred in foreign nations that are intended to
harm U.S.-based Financial Institutions, the Department has revised
Section III(a)(1)(B) in the Final Amendment to exclude foreign
convictions that occur within foreign jurisdictions that are included
on the Department of Commerce's list of ``foreign adversaries.'' \58\
Therefore, the Department will not consider foreign convictions that
occur under the jurisdiction of the listed ``foreign adversaries'' as
an ineligibility event. To reflect this change, the Department has
added the phrase ``excluding convictions and imprisonment that occur
within foreign countries that are included on the Department of
Commerce's list of `foreign adversaries' that is codified in 15 CFR
7.4'' to Section III(a)(1)(B).
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\58\ 15 CFR 7.4. The list of foreign adversaries currently
includes the following foreign governments and non-government
persons: The People's Republic of China, including the Hong Kong
Special Administrative Region (China); the Republic of Cuba (Cuba);
the Islamic Republic of Iran (Iran); the Democratic People's
Republic of Korea (North Korea); the Russian Federation (Russia);
and Venezuelan politician Nicol[aacute]s Maduro (Maduro Regime). The
Secretary of Commerce's determination is based on multiple sources,
including the National Security Strategy of the United States, the
Office of the Director of National Intelligence's 2016-2019
Worldwide Threat Assessments of the U.S. Intelligence Community, and
the 2018 National Cyber Strategy of the United States of America, as
well as other reports and assessments from the U.S. Intelligence
Community, the U.S. Departments of Justice, State and Homeland
Security, and other relevant sources. The Secretary of Commerce
periodically reviews this list in consultation with appropriate
agency heads and may add to, subtract from, supplement, or otherwise
amend the list. Section III(a)(1)(B) of the Final Amendment will
automatically adjust to reflect amendments the Secretary of Commerce
makes to the list.
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Due Process
The Department received several comments regarding the conduct
described in Section III(a)(2) as involving ``engaging in a systematic
pattern or practice'' that can cause ineligibility and the
ineligibility notice process. Generally, the comments argued that the
Department had given itself too much authority to disqualify parties
based on its own factual determinations without affording them
sufficient due process protections and had also reserved for itself the
sole authority to determine ineligibility without external review and
without ensuring due process.
A few commenters claimed that the Proposed Amendment has a
procedural due process flaw that renders it unconstitutional under
Article III of the Constitution, the Due Process Clause of the Fifth
Amendment, and the Seventh Amendment. These commenters assert that
courts have found that the sanction of depriving an entity of its
ability to engage in its business is analogous to a criminal penalty
and that only after sufficient due process can an individual be barred
from engaging in an otherwise legal practice. These commenters express
doubts about the ability of an administrative agency, like the
Department, to assert this power without substantial additional
procedural protections. Other commenters contended that the proposed
process would have resulted in disqualification without any judicial
recourse and that, by leaving too much discretion to the Department,
would create uncertainty and adversely affect the availability of
Retirement Investors to get sound advice. Some commenters asserted that
the Department's ineligibility process was insufficient because it did
not provide a chance for a hearing before an impartial administrative
judge or Article III judge, no express right of appeal, and no formal
procedures to present evidence, and provided the Department the sole
discretion to prohibit the Investment Professional or Financial
Institution from relying on PTE 2020-02.
Some commenters also stated that while the six-month notice period
provided in the Proposed Amendment may be adequate time to send a
notice to Retirement Investors, it is insufficient time for a Financial
Institution to determine an alternative means of complying with ERISA
in order to continue to provide advice to Retirement Investors. These
commenters requested that the Department modify the Proposed Amendment
to provide for at least 12 months to wind-down advice or to find an
alternative means of complying with ERISA following a finding of
ineligibility. One commenter additionally claimed that it was
problematic that the opportunity to be heard and to challenge a
disqualification based upon a domestic conviction had been eliminated.
Another commenter urged the Department to eliminate the opportunity to
cure misconduct from the exemption. This commenter claimed that this
provision undermines compliance and accountability by reassuring
Investment Professionals and firms that, even if they engage in a
``systemic pattern or practice'' of violating the conditions of the
exemption, or even provide materially misleading information to the
Department related to their conduct under the exemption, they will have
the opportunity to cure and continue to rely on the exemption. The
commenter asserted that Investment Professionals and firms who have
engaged in these types of conduct will not desist from such misconduct
during the lengthy cure period and, as a result, this provision
threatens to expose Retirement Investors to continued harm. The
commenter also requested that the Department eliminate any provision
allowing Investment Professionals who are found ineligible to rely on
PTE 2020-02 to nevertheless rely on other prohibited transaction
exemptions or seek an individual transaction exemption from the
Department. The commenter claimed that these provisions conflict with a
proper regulatory approach that should seek to protect the public and
deter misconduct by foreclosing exemptive relief to those Investment
Professionals and firms who are demonstrably unfit to enjoy it.
After consideration of the comments and to address commenters' due
process concerns, the Department has determined to modify Section
III(a)(2) of the ineligibility provisions. As amended, Section
III(a)(2) of the Final Amendment describes disqualifying conduct, which
will be subject to a one-year Transition Period, instead of the six-
month period originally proposed. The changes to the disqualifying
conduct provisions of the exemption will remove the discretion of the
Department from the ineligibility determination process regarding the
occurrence of the Prohibited Misconduct under Section III(a)(2) while
adding protections to the exemption by conditioning disqualification on
determinations in court proceedings. Ineligibility under amended
Section III(a)(2) will result from a Financial Institution or an
Investment Professional being found in a final judgment or court-
approved settlement in a Federal or State criminal or civil court
proceeding brought by the Department, the Department of the Treasury,
the IRS, the SEC, the Department of Justice, the Federal Reserve, the
Federal Deposit Insurance Corporation, the Office of the Comptroller of
the Currency, the Commodity Futures Trading Commission, a State
insurance or securities regulator, or State attorney general to have
participated in one or more of the following categories of conduct
irrespective of whether the court specifically considers this exemption
or its terms: (A) engaging in a systematic pattern or practice of
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conduct that violates the conditions of this exemption in connection
with otherwise non-exempt prohibited transactions; (B) intentionally
engaging in conduct that violates the conditions of this exemption in
connection with otherwise non-exempt prohibited transactions; (C)
engaging in a systematic pattern or practice of failing to correct
prohibited transactions, report those transactions to the IRS on Form
5330 or pay the resulting excise taxes imposed by Code section 4975 in
connection with non-exempt prohibited transactions involving investment
advice as defined under Code section 4975(e)(3)(B); or (D) providing
materially misleading information to the Department, the Department of
the Treasury, the Internal Revenue Service, the Securities and Exchange
Commission, the Department of Justice, the Federal Reserve, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Commodity Futures Trading Commission, a State insurance
or securities regulator, or State attorney general in connection with
the conditions of this exemption.
In making this change to the Final Amendment, the Department has
kept the same four triggers that it proposed in Section III(a)(2) of
the Proposed Amendment. Rather than relying solely on the Department to
determine whether a covered entity had engaged in one of these four
triggers, however, the Department has determined that it is appropriate
to limit eligibility to instances where a court has determined that a
Financial Institution or Investment Professional has engaged in certain
identified conduct. This underlying conduct is unchanged from the
proposal. The Department agrees that relying on a determination from a
court more appropriately balances the due process concerns raised by
some comments. The Department also agrees with other commenters who
emphasized that this identified conduct is a significant cause for
concern, and that it is appropriate to condition ineligibility on a
determination the Financial Institution or Investment Professional have
engaged in this behavior.
Under this Final Amendment, ineligibility under Section III(a)(2)
will operate in a similar manner to ineligibility for a criminal
conviction defined in Section III(a)(1), as ineligibility will be
immediate, subject to the timing and scope of the ineligibility
provisions in Section III(b), including the One-Year Transition Period.
Specifically, a Financial Institution or an Investment Professional
will only become ineligible after it has been determined in a final
judgment or a court-approved settlement that the conduct set forth in
Section III(a)(2) has occurred. By removing the Opportunity to be Heard
and Ineligibility Notice process and providing that ineligibility is
triggered only after a conviction, a court's final judgment, or a
court-approved settlement, the Financial Institution, an entity in the
same Controlled Group as the Financial Institution, or an Investment
Professional will have the due process that is afforded in formal legal
proceedings. Additionally, having ineligibility occur only after a
conviction, court's final judgment, or court-approved settlement
provides those entities and persons confronting ineligibility with
ample notice and time to prepare for their ineligibility and operations
during the ensuing One-Year Transition Period discussed below. An
ineligible Financial Institution or Investment Professional would again
become eligible to rely on this exemption if there is a subsequent
judgment reversing the conviction or final judgment.
Timing of Ineligibility and One-Year Transition Period
Several commenters expressed concern that the ineligibility
provisions would apply retrospectively and urged the Department to
confirm that ineligibility under the exemption would occur only on a
prospective basis after finalization of the amended exemption.
Additionally, some commenters asserted that the six-month period
provided in the Proposed Amendment following ineligibility would be
insufficient for Financial Institutions and Investment Professionals to
prepare for any inability to provide retirement investment advice for a
fee, determine an alternative means of complying with ERISA, and to
prepare and submit an individual exemption application. One commenter
argued that the change in the Proposed Amendment from a one-year
transition period to six months was unduly punitive and contended that
shortening the period would only mean that Retirement Investors would
lose access to a trusted adviser sooner rather than later, generally
for reasons entirely unrelated to the services provided to the
Retirement Investor. Another commenter stated that providing a longer
12-month period would enable Financial Institutions to find alternative
compliant means to help Retirement Investors and would enable
Retirement Investors to continue to receive investment recommendations
in their best interest.
One commenter claimed that the sudden real or impending loss of
significant numbers of providers, or even a handful of the largest
among them, as the result of their disqualification would cause chaos
among plans, which would have no more than six months to find suitable
replacements and impose harm on the Retirement Investors who had hired
a disqualified firm. Another commenter argued that reducing the timing
of ineligibility from one year to six months after a finding of
ineligibility would make it more unlikely that the disqualified person
could timely obtain an individual prohibited transaction exemption. The
commenter stated that the result was especially significant because the
Department was simultaneously proposing to eliminate alternative paths
for exemptive relief for providing fiduciary investment advice under
other class exemptions, making PTE 2020-02 the only available class
exemption.
In response to these comments, the Department confirms that
ineligibility under Section III will be prospective and only
convictions, final judgments, or court-approved settlements occurring
after the Applicability Date of the Final Amendment exemption will
cause ineligibility. The proposed six-month period before ineligibility
begins has been removed from the amended exemption and amended Section
III(b) requires ineligibility for the Financial Institution or
Investment Professional to begin immediately upon the date of
conviction, final judgment, or court-approved settlement that occurs on
or after the Applicability Date of the exemption. The Department has
replaced the six-month lag period for beginning of ineligib
[…truncated; see source link]Indexed from Federal Register on April 25, 2024.
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