Page 50 - Investment Advisor - December 2021

THE COMPLIANCE COACH

By Thomas D. Giachetti

Beware of DOL Prohibited Transactions

Advisory fiduciaries need to avoid the minefield of specific ERISA and
IRC customer protection rules.

o many advisors work with retire- • Conduct a retrospective annual review
ment plans and retirement inves- in an effort to detect and prevent viola-
Stors but have little appreciation of tions of, and achieve compliance with,
the corresponding ERISA/Department the Impartial Conduct Standards and
of Labor prohibited transaction issues. the conditions of the DOL Rule.
I recently sat down with my colleague Importantly, advisors must remain
and our ERISA expert, Ryan Walter, to aware that the DOL Rule does not provide
discuss the details. prohibited transaction relief for transac-
Both the Employee Retirement tions involving ERISA or IRA assets if the
Income Security Act of 1974, as amended, advisor, its representatives, or an affiliate is:
and the Internal Revenue Code contain 1. the employer of employees covered
specific sets of prohibited transactions DOL EXEMPTIONS by the plan; or
that apply when rendering services to The Labor Department, recognizing 2. a named fiduciary or plan admin-
ERISA plans and/or participants and that the broad application of prohib- istrator, or an affiliate thereof, who
IRA owners, respectively. ited transaction rules would prohibit was selected to provide advice to
There are three enumerated prohibit- many common and beneficial industry the plan by another fiduciary who
ed transactions that apply to ERISA and practices, provides several prohibited is not independent of that firm, its
IRC fiduciaries. To paraphrase these transaction exemptions. representatives, and their affiliates.
prohibited transactions applicable to Included in the universe of poten- The relief provided by the DOL Rule
ERISA and IRC fiduciaries: tial prohibited transaction exemptions also excludes discretionary actions on
1. Dealing with the assets of the plan is Prohibited Transaction Exemption the part of the advisor. The protec-
in the fiduciary’s own interest 2020-02, or DOL Rule, which provides tions that are included in the DOL Rule
(referred to as the “Self-Dealing exemptive relief from the above-ref- were designed specifically for non-dis-
Provision”); erenced fiduciary prohibited transac- cretionary investment advice arrange-
2. The fiduciary acting in any transac- tions under both ERISA and the IRC. ments. Consequently, if an advisor uses
tion involving the plan on behalf of By adhering to the DOL Rule’s require- its discretion to engage in a prohibited
a party whose interests are adverse ments, then, otherwise prohibited trans- transaction, the protections of the DOL
to the interests of the plan or its actions can become permissible. Rule will not be available to the advisor.
participants or beneficiaries; or, In short, the DOL Rule requires Ryan cautions, if you have concerns that
3. Receiving any compensation for advisors to: your compensation arrangements, invest-
the fiduciary’s own account from • Adhere to the Impartial Conduct ment strategies or methods of providing
any party dealing with the plan Standards. advice may trigger one or more of the
in connection with a transaction • Provide a written acknowledgment above prohibited transactions, promptly
involving the assets of the plan (the of ERISA and/or IRC fiduciary status. address such concerns with counsel who
“Anti-Kickback Provision”). • If applicable, document and dis- is experienced in identifying and address-
When an advisor provides a recom- close the rationale behind why an ing prohibited transaction issues. In short:
mendation to an ERISA or IRA client, ERISA rollover and/or IRA transfer don’t dabble, get real counsel regarding
and that recommendation results in is in the client’s best interest. these critical issues.
a direct or indirect increase in com- • Maintain and enforce compliance
pensation to the advisor, the advisor policies and procedures designed Thomas D. Giachetti is chairman of the
should carefully consider whether to ensure compliance with the Investment Management and Securities
the advice will constitute a prohib- Impartial Conduct Standards and Practice Group of Stark & Stark. He can be Adobe Stock
ited transaction. the DOL Rule in general. reached at [email protected].

48 INVESTMENT ADVISOR DECEMBER 2021 | ThinkAdvisor.com