Posted
By Alden Bianchi
on April 11th, 2016
Posted
in DOL, IRS
After six years in the hopper, the Department of Labor
finally issued final fiduciary regulations late last week that will greatly
impact a wide variety of stakeholders. The Employee Retirement Income Security
Act (ERISA) governs fiduciary conduct and establishes rules that bar certain
transactions, referred to as “prohibited transactions.”
While ERISA’s fiduciary
standards and prohibited transaction rules apply principally to retirement
plans, ERISA also amended the Internal Revenue Code to impose nearly identical
prohibited transaction, but not fiduciary, rules on IRAs, Health Savings
Accounts, Archer Medical Savings Accounts and Coverdell Education Savings
Accounts. The Department of Labor is charged with interpreting the ERISA and
Code provisions relating to fiduciary status and prohibited transactions, and
its much anticipated suite of final regulations:
·
Makes sweeping
changes to the definition of the term “fiduciary” under ERISA;
·
Imposes strict,
new conflict of interest provisions on persons who provide investment advice to
ERISA-covered retirement plans and Individual Retirement Accounts; and
·
Modifies a
handful of existing prohibited transaction class exemptions.
The purpose of this post is to alert readers to the
publication of these new fiduciary and prohibited transaction rules and provide
links to the original source materials. In the coming weeks and months we will
delve into the particulars of each of the components of the new rules. We will
then turn our attention to the impact of these rules on various
stakeholders—including large and small retirement plans, the financial services
industry (including broker-dealers and registered investment advisors) and
other issuers of financial products and providers of financial services.
The final rules make some
important and welcome changes to a proposed set of rules the DOL issued in
2015, which we explained in a series of posts beginning here. The newly issued final rules include the following:
·
Definition of
the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice
(found here)
·
Class Exemption
for Principal Transactions in Certain Assets between Investment Advice
Fiduciaries and Employee Benefit Plans and IRAs (found here)
·
Amendment to and
Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain
Transactions Involving Insurance Agents and Brokers, Pension Consultants,
Insurance Companies, and Investment Company Principal Underwriters (found here)
·
Amendment to and
Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for
Securities Transactions Involving Employee Benefit Plans and Broker-Dealers;
Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions
Respecting Certain Classes of Transactions Involving Employee Benefits Plans
and Certain Broker-Dealers, Reporting Dealers and Banks (found here)
·
Amendment to
Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From
Prohibitions Respecting Certain Classes of Transactions Involving Employee
Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks (found here)
In addition, the Department of
Labor issued a chart explaining the changes that the final rules make to the earlier,
proposed rules, and a useful fact sheet that offers a comprehensive, high-level summary.
The DOL has announced that the deadline for compliance
with the new requirements will start in April 2017. In the Department’s view,
this delay, among other things, “provides adequate time for plans and their
affected financial services and other service providers to adjust to the change
from non-fiduciary to fiduciary status.” While a full year sounds like a long
time, it’s not. These rules are staggeringly complex, and they will in some
though not all cases require major changes on the part of financial advisors of
most stripes. It is difficult to underestimate the significance of the new
rules. At bottom, they will change the way that advice is delivered,
principally to small retirement plans and to IRA investors.
This rule has been in development for more than 6
years. During that time, the financial services industry has been unwavering in
its opposition. It remains to be seen whether the changes to the final rule,
purportedly made in response to criticisms voiced in formal comments and in
three days of public hearings, will assuage critics or invite further
challenges in the courts or in Congress. Regardless, given the proximate
compliance date and breadth of the final regulations, financial advisors cannot
adopt a wait-and-see approach.
* * * * *
Given the widespread
implications of this rule to companies in the financial services industry, we are
also planning to host a webinar on the subject of the DOL’s new suite of final
fiduciary and conflict of interest rules. The webinar will focus on the new
definition of “fiduciary,” the Best Interest Contract Exemption, and the Class
Exemption for Principal Transactions. It will also survey the changes to
several Prohibited Transaction Exemptions. Please stay tuned for further
details. If you have particular issues you would like us to address on this
blog or during the webinar, please do not hesitate to contact me at AJBianchi@mintz.com. We hope you will follow us along the way.
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