The DOL Issues “Investment Advice” FAQs – Continues to Try to Find an Ideal Balance for the Brave New Fiduciary World

November 07, 2016

The U.S. Department of Labor (the “DOL”) released its first set of FAQs (the “FAQs”) regarding the DOL’s recently finalized “investment advice” regulation and various related exemptions (collectively, the “Final Rules”) on October 27, 2016. Dechert previously published an in-depth discussion of the Final Rules in its May 2016 OnPoint, The Brave New Fiduciary World Has Arrived – The DOL Tries to Find a More Ideal Balance in the Final “Investment Advice” Rules, and followed that with three related industry-focused OnPoints.

Those dealing with retirement investors (including retirement plans and individual retirement accounts) will either have to steer clear of giving advice covered by the Final Rules or operate in compliance with them. As the DOL stated in the FAQs, “Firms and advisers [that give advice covered by the Final Rules] must either structure their compensation arrangements to avoid prohibited transactions or they must rely on [a prohibited transaction] exemption.”

Many of the FAQs focus on the application of Prohibited Transaction Exemption (“PTE”) 2016-01 (the “BIC Exemption”), a critical new class exemption designed to permit certain compensation arrangements and fee structures for advisers and financial institutions that otherwise would be prohibited, while at the same time protecting covered retirement investors. The FAQs also address the application of the new PTE 2016-02 (the “Principal Transactions Exemption”), which allows advisers and financial institutions to engage in certain principal transactions with retirement investors, and amended PTE 84-24, which generally allows fiduciaries to receive compensation in connection with retirement investors’ purchase of certain insurance products. In the absence of these exemptions, and in particular the BIC Exemption, a wide range of conduct by those considered “investment advice” fiduciaries under the Final Rules could be prohibited under Section 406(b) (and possibly Section 406(a)) of the Employee Retirement Income Security Act of 1974 (“ERISA”) and Section 4975 of the Internal Revenue Code of 1986.

In many respects, the FAQs do not break new ground. In some cases, however, they do provide useful clarifications, and, in others, there is some new information and guidance. The following is a summary of certain aspects of the FAQs.

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