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DOL Issues Final Investment Advice Prohibited Transaction Exemption DOL Issues Final Investment Advice Prohibited Transaction Exemption

DOL Issues Final Investment Advice Prohibited Transaction Exemption

On December 15, 2020, the Department of Labor ("DOL") issued its final prohibited transaction exemption [Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees (] ("PTE") that sets forth requirements for investment advisors who provide investment advice to retirement plans, retirement plan participants, and IRA owners. The PTE confirms the reinstatement of the DOL's “five-part test” for determining fiduciary status and expands fiduciary liability to individuals who previously were not considered fiduciaries under the prior rule.

Under the PTE, plan fiduciaries are required to meet impartial conduct standards, provide certain disclosures, conduct annual reviews, maintain policies and procedures, and keep records.  However, the PTE relaxes proposed restrictions on fiduciary compensation to allow fiduciaries to be compensated for advice to rollover assets from a retirement plan to an individual retirement account (“IRA”) and to engage in principal transactions that previously were not permitted. 


The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), prohibits fiduciaries from engaging in self-dealing and receiving compensation from third parties in connection with transactions that involve the retirement plans and IRAs. 

In 1975, the DOL issued a regulation establishing a “five-part test” for fiduciary status under ERISA. Under the “five-part test” a person provides “investment advice” if they: (i) render advice to a plan as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property; (ii) on a regular basis; (iii) based on a mutual understanding; (iv) that such advice will be a primary basis for investment decisions; and that (v) the advice will be individualized to the retirement plan. In 2016, the DOL finalized a new regulation that would have replaced the 1975 regulation. However, the U.S. Court of Appeals for the Fifth Circuit vacated that rulemaking, including its new exemptions.

On July 7, 2020, the DOL proposed this class exemption. On the same day, it removed the language of the 2016 regulation from the Federal Register and reinstated the 1975 regulation.

PTE 2002-02

The PTE permits Investment Professionals and Financial Institutions ("IP/FIs") who provide fiduciary investment advice to Retirement Investors to receive compensation, direct or indirect, and engage in specified transactions.
  • A Financial Institution is an entity that employs or retains the Investment Professional, and that is: (a) registered under the Investment Advisers Act of 1940 or under state law; (b) a bank or similar institution, or a savings association; (c) an insurance company that meets specified registration requirements; or (d) a broker or dealer registered under the Securities Exchange Act of 1934.
  • An Investment Professional is someone who is: (i) a fiduciary of a benefit plan or IRA due to providing covered investment advice under the PTE to retirement plans or IRAs; (ii) an employee, contractor, agent, or representative of a Financial Institution; and (iii) satisfies applicable federal and state licensing requirements for receipt of compensation.
  • A Retirement Investor is (a) a participant or beneficiary of a benefit plan with authority to direct the investment of his or her account; (b) the beneficial owner of an IRA acting on behalf of the IRA; or (c) a fiduciary of a benefit plan or IRA.
Investment Advice Arrangement

The PTE requires IP/FIs to comply with impartial conduct standards in providing fiduciary investment advice to Retirement Investors. Financial Institutions must also acknowledge fiduciary status, describe in writing the services they will provide and their material conflicts of interest, and adopt policies and procedures to help ensure compliance.

Impartial Conduct Standards

The PTE requires IP/FIs to comply with the following “Impartial Conduct Standards”:
  1. Best Interest. Investment advice must be, at the time provided, in the "best interest" of the Retirement Investor. The “best interest” standard was aligned with the conduct standards in the Securities and Exchange Commission’s Regulation Best Interest and the fiduciary duty of registered investment advisors under securities laws.

    Advice is in the Retirement Investor's "best interest" if it 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 does not place the financial or other interests of the IP/FI or any affiliate or other party ahead of the interests of the Retirement Investor. 
  2. Reasonable Compensation. Compensation received, directly or indirectly, by the IP/FI, affiliates, and related entities for the services is reasonable, and the IP/FI seeks to obtain the best execution of the investment transaction reasonably available under the circumstances.
  3. Not Materially Misleading. The IP/FI's statements to the Retirement Investor about the recommended transaction and other relevant matters are not, at the time made, materially misleading.

Prior to engaging in the relevant transaction, the Financial Institution must provide a written disclosure to Retirement Investors that:
  1. Acknowledges the IP/FIs are fiduciaries;
  2. Describes the services to be provided; and
  3. Describes the IP/FI's material conflicts of interest that is accurate and not misleading.
In addition, prior to engaging in a rollover recommendation under the PTE, the Financial Institution must provide documentation of specific reasons for the rollover recommendation, including reasons it satisfies the best interest standard.
Policies and Procedures

The PTE requires Financial Institutions to establish, maintain, and enforce written policies and procedures ("P&Ps") prudently designed to ensure that the IP/FIs comply with the impartial conduct standards. The P&Ps must mitigate conflicts of interest so as not to create an incentive for the IP/FIs to place their own interests ahead of those of the Retirement Investor.

In addition, the Financial Institution must now document “the specific reasons” that any recommendation to roll over assets is in the best interest of the Retirement Investor.

Retrospective Compliance Review

The Financial Institution must conduct annual retrospective reviews to detect and prevent violation of the impartial conduct standards. The methodology and results of this review must be reduced to a written report and any senior executive may now certify the report, rather than only the CEO as required by the original proposal.
  1. Proprietary Products and Third-Party Payments

    The DOL confirmed that IP/FIs can satisfy the Best Interest standard when they provide investment advice on proprietary products or on a limited menu of investment options, including limitations to proprietary products and products that generate third-party payments (such as shareholder servicing and distribution fees).  To do so, the IP/FIs should disclose any material conflicts of interest related to the products.
  2. Proprietary Products and Limited Menus of Investment Products

    For the Financial Institutions that offer proprietary products or limited product menus, they should be prepared to justify their process for complying with the Impartial Conduct Standards and avoiding incentives that create conflicts of interests or “selectively promote” certain products even if the practices do not directly involve providing investment advice.

The PTE does not apply in the following three circumstances:
  1. Employer or Not Independent. The IP/FI or any affiliate is either (a) the employer of employees covered by the plan, or (b) a named fiduciary or plan administrator with respect to the plan who was selected by a fiduciary and that is not independent of the IP/FI and affiliates.
  2. Software Only. The transaction is a result of investment advice generated solely by an interactive website by software.
  3. Not Investment Advice. The transaction involves the Investment Professional acting in a fiduciary capacity other than as an investment advice fiduciary.

The PTE now provides that a prohibited transaction does not occur due to violation of the PTE's conditions if all the following conditions are satisfied:
  1. The Retirement Investor is made whole for any investment losses.
  2. The Financial Institution corrects the violation and notifies the DOL via email within 30 days of the correction.
  3. The correction occurs no more than 90 days after the Financial Institution learned, or reasonably should have learned, of the violation.
  4. The correction is reported in the Financial Institution’s annual retrospective compliance review.

IP/FIs are ineligible to rely on the PTE for 10 years after conviction of any crime described under ERISA Section 411 arising out of investment advice, or after receiving a written ineligibility notice from the DOL.


The PTE requires Financial Institutions to maintain records demonstrating compliance with the PTE for six years. These records must be disclosed to any authorized employee of the DOL or Department of the Treasury for enforcement purposes.


The new PTE would not cover advice arrangements that rely only on robo-advice without interactions with an investment professional. However, the PTE would cover “hybrid” robo-advice arrangements, which involve computer modeling advice along with interactions with an investment professional.

Rollover Advice

The DOL intends that all prongs of the “five-part test” must be satisfied for a financial institution or investment professional to be an investment advice fiduciary when making a rollover recommendation.

The DOL will apply a facts and circumstances analysis to determine if investment advice is provided for rollover recommendations. The DOL acknowledges that a single instance of advice to roll over retirement plan assets would not meet the "regular basis" prong of the “five-part test”. However, advice to roll assets out of or into a retirement plan does satisfy the "regular basis" prong if the provider will regularly give advice regarding the IRA during the course of a more lengthy relationship, even if the rollover advice is given at the beginning of that relationship. The DOL will consider the reasonable understanding of each of the parties if no mutual agreement or arrangement is demonstrated.


The Final Exemption applies 30 days after its publication in the Federal Register and the effective date could be delayed if the PTE is reviewed by the incoming Biden administration.  The DOL’s current non-enforcement policy will continue for one year following publication (the Final Exemption was published on December 18, 2020).

For more information about the new PTE and how it affects your employee benefit plans, please contact Gary Blachman, Melissa Proffitt, Erik Hansen, Matt Fornshell, Ian Minkin, Austin Anderson, or the Ice Miller LLP attorney with whom you work.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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