DOL Releases Final “Investment Advice” Regulation: Final Regulation Will Significantly Impact the Manner in Which Investment Advice Is Provided to Retirement Plans and IRAs and Will Often Increase the Litigation Risk of Providing Such Advice

Sullivan & Cromwell LLP - April 20, 2016
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On April 6, 2016, the Department of Labor (the “DOL”) promulgated final regulations (the “Final Regulations”) defining the circumstances in which a person will be treated as a fiduciary under both the Employee Retirement Income Security Act of 1974 (“ERISA”) and Section 4975 of the Internal Revenue Code (the “Code”) by reason of providing investment advice to retirement plans and individual retirement accounts (“IRAs”).  As part of the regulatory package, the DOL also released final versions of prohibited transaction class exemptions (“PTEs”) intended to minimize the industry disruptions that might otherwise result from the Final Regulations, most notably, the so-called “Best Interest Contract Exemption” (the “BIC Exemption”) and the “Principal Transaction Exemption”.

While the Final Regulations address many of the troublesome aspects of the proposed regulations and PTEs that were issued on April 14, 2015 (collectively, the “Proposed Regulations”), the primary effect of the Proposed Regulations—more broadly subjecting financial service providers to the fiduciary rules under ERISA and the Code—remains unchanged.  As a consequence, the Final Regulations can be expected to have a significant impact.