The Department of Labor announced its long-awaited final class exemption from certain prohibited transaction under the Employee Retirement Income Security Act of 1974, as
amended (the Act).
Putting aside whether the Biden administration will freeze and repeal this exemption, this post is designed to address the differences between the proposal and the final exemption. The final exemption appears to be nearly identical to the proposal, with the following three major differences.
First, the final exemption includes a new disclosure requirement, which was not contemplated by the proposal. The exemption requires the following of a Financial Institution:
Prior to engaging in a rollover recommended pursuant to the exemption, the Financial Institution provides the documentation of specific reasons for the rollover recommendation, required by [the exemption], to the Retirement Investor.
Second, the policies and procedures requirement appears to have been softened. The final exemption will require a Financial Institution relying on the exemption to maintain “policies and procedures [to] 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 ahead of the interest of the Retirement Investor.” This creates a “reasonable person” standard for reviewing policies and procedures, whereas the proposed exemption would have required policies and procedures that were “prudently designed to avoid misalignment of the interests” between the Financial Institution and Investment Professional.
Lastly, the final exemption contains a self-correction process for any inadvertent non-compliance. The final exemption states:
A non-exempt prohibited transaction will not occur due to a violation of the exemption’s conditions with respect to a transaction, provided:
(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 and notifies the Department of Labor of the violation and the correction via email to IIAWR@dol.gov within 30 days of correction;
(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).