PLANADVISER - May/June 2021 - 39

compliance consult
David Kaleda
Caution Needed Regarding Rollovers
Many recommendations may now be investment advice
THIS PAST DECEMBER 18, the Department of Labor (DOL)
published Prohibited Transaction Exemption (PTE) 2020-02,
Improving Investment Advice for Workers and Retirees. In the
exemption's preamble, the DOL changed its interpretation of
the term " investment advice " for purposes
of the Employee Retirement Income Security
Act (ERISA) and the Internal Revenue
Code (IRC). As a result, more recommendations
to roll over or transfer assets from
plans to individual retirement accounts
(IRAs) can be subject to ERISA's fiduciary
provisions and the prohibited transaction
provisions of the act and the IRC. Financial
professionals and their supervising institutions
should begin reviewing their interactions
with current and prospective clients
to determine whether they provide investment
advice.
The preamble presents the DOL's final
interpretation as to when giving investment
advice is a fiduciary act. The DOL then published, this
April, Fiduciary Advice Exemption: PTE 2020-02 Improving
Investment Advice for Workers and Retirees Frequently
Asked Questions (FAQ) in which it affirmed and further
explained its views. Notably, the guidance applies to both
rollover and custodian-to-custodian transfers.
Since at least 2005, as expressed in Advisory Opinion
2005-23A-aka the Deseret letter-the DOL had been of the
view that a recommendation to take a distribution from an
ERISA-covered plan and roll over that distribution to an IRA
was not a recommendation as to the advisability of investing
in, purchasing or selling securities or other property. Therefore,
such a recommendation was not investment advice as
defined in a regulation it promulgated in 1975. However, in
the preamble, the DOL announced that its analysis in the
Desert letter was incorrect and reversed its position.
The DOL also explained in the preamble its interpretation
of other facets of the 1975 regulation. In so doing, it aims to
make sure more rollover and transfer recommendations are
investment advice under ERISA and the IRC. The 1975 regulation
sets forth a five-part test for purposes of determining
whether a person provides investment advice. One part, or
prong, of that test is that recommendations to invest in, buy
or sell securities be made on a regular basis. In the preamble
and the FAQ, the DOL states that a rollover or transfer recommendation
can be the first step in the creation of an ongoing
investment advice relationship and thus the regular basis
prong could be met, even with respect to a prospective client.
Moreover, the preamble and FAQ provide additional guid...
the preamble
and FAQ provide
additional
ance on how to interpret the other prongs of the test. As a
result, the department has made it more
difficult for financial advisers and their
supervising
financial
broker/dealers(B/Ds),
registered
institutions-e.g.,
investguidance
on how
to interpret the
other prongs of
the five-part test.
ment advisers (RIAs), banks, trust companies,
insurance companies, insurance sales
and marketing intermediaries-to take the
position that they do not provide investment
advice. This is the case concerning
the rollover or transfer recommendation
as well as recommendations provided with
regard to ongoing investment of plan and
IRA assets. For example, holding oneself
out in marketing materials as a trusted
adviser, in the eyes of the DOL, is evidence
of a mutual understanding that the financial
professional provides advice as a fiduciary notwithstanding
a contractual disclaimer to the contrary.
At bottom, financial professionals and their firms should
be looking at their interactions with clients and prospective
clients to determine if conversations they have regarding
rollovers and transfers from an ERISA-covered plan to an IRA
are investment advice. Furthermore, per the preamble and
the FAQ, they should also review recommendations made
in connection with rollovers and transfers from an ERISAcovered
plan to another ERISA-covered plan or from one
IRA to another. Importantly, not every rollover or transfer
recommendation is investment advice. Also, the provision
of investment education pursuant to DOL guidance is
not investment advice. However, in the event they provide
investment advice, the financial professional and financial
institution will likely need to comply with the conditions of
the exemption or, possibly, another exemption, in order to
address certain conflicts of interest. In other words, we have
some work to do in the coming weeks and months.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered,
in Washington, D.C. He
has an extensive background in the financial services sector. His
range of experience includes handling fiduciary matters affecting
investment managers, advisers, broker/dealers, insurers, banks and
service providers.
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PLANADVISER - May/June 2021

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