DOL seeks to streamline PTE process with updated procedures 

September 3, 2024

Updated Department of Labor (DOL) procedures for handling requests for prohibited transaction exemptions (PTEs) require more detailed disclosures from ERISA plan sponsors. The final rules also enhance the agency’s scrutiny of independent fiduciaries and appraisers hired to safeguard plans and their participants. Although service providers may also seek PTEs, this article focuses on aspects of the final rules most relevant to sponsors (including several instances in the final rules that differ from the agency’s 2022 proposed changes).

ERISA allows DOL to issue administrative PTEs on a class or an individual basis. In some instances, a sponsor or its legal counsel may first contact DOL about whether a particular situation would require a PTE. Under the final rule, these presubmission communications must identify the transaction and specify the ERISA prohibited transaction provisions at issue but do not need to identify the plan, applicant, or other parties involved. (This approach is less stringent than the 2022 proposal, which would have barred anonymous presubmission discussions.) Although DOL won’t accept oral exemption applications or grant exemptions orally, not all communications need to be in writing. Applicants may request and receive oral feedback when preparing an application. However, DOL won’t be bound by that feedback when reviewing the application or conducting an audit.

Administrative record. Presubmission communications, including any oral statements, become part of the administrative record — subject to public disclosure after submission of a written application. The application must identify whether the applicant engaged in presubmission communications, so DOL can link those discussions to the administrative record. A person who contacts DOL with general questions not involving a specific factual scenario won’t be treated as a presubmission applicant.

Previous exemptions may be informative. DOL’s 2022 proposal would have provided that previously granted PTEs don’t guarantee the agency will issue similar PTEs — or agree to similar conditions — in the future. Commenters indicated that DOL’s prior PTEs should have precedential value to ensure consistent treatment of applicants in similar circumstances. DOL is unwilling to guarantee precedential value, but the final rule states that previously issued PTEs “may inform” DOL’s decisions about proposing future PTEs, depending on an application’s “unique facts and circumstances.”

Some PTEs may require the involvement of an independent fiduciary and appraiser. DOL’s proposed updates to the PTE procedures in 2022 included significantly stricter standards for assessing these vendors’ independence and identifying potential conflicts of interest. In response to commenters’ assertions that the proposal would substantially reduce the number of available qualified independent fiduciaries and appraisers, the final rule generally retains existing requirements with only modest enhancements.

Qualified independent fiduciaries. A qualified independent fiduciary must be independent of any “party in interest” engaging in the transaction. Parties in interest encompass a broad group of entities and individuals with relationships to the plan, including the sponsor, plan fiduciaries, service providers, and their affiliates. DOL will continue to apply existing standards for assessing the fiduciary’s independence based on the facts and circumstances, with several modifications:

• DOL’s evaluation of the fiduciary’s independence will consider whether the plan’s counterparty in the transaction influenced the fiduciary’s selection.
• A fiduciary may be considered independent if its projected revenue from parties in interest engaging in the transaction isn’t more than 5% of annual revenue. (The proposal would have reduced this threshold to 2%.) Although the rule states that amounts exceeding 2% “merit more stringent scrutiny,” the preamble notes that a fiduciary whose revenue doesn’t exceed the 2% threshold “is not automatically deemed independent.” DOL may consider other facts and circumstances when determining independence, regardless of the revenue threshold.

The final rule generally prohibits contractual provisions limiting the liability of independent fiduciaries, but contracts may provide for reimbursement of those fiduciaries’ legal expenses for defending third-party claims in certain limited situations. While an independent fiduciary isn’t required to maintain specific levels of fiduciary liability insurance, the application must describe certain elements of the independent fiduciary’s insurance coverage and a representation that an appropriate fiduciary without material conflicts of interest diligently reviewed the coverage’s sufficiency.

Qualified independent appraisers. Appraisers are subject to the same independence requirements and compensation limits that apply to qualified independent fiduciaries. (Unlike the 2022 proposal, appraisers needn’t be independent of the independent fiduciary and other parties involved in the transaction.) In assessing an appraiser’s independence, DOL will consider whether “an appraiser is likely to be retained by the applicant for appraisals due to its provision of an appraisal submitted with the exemption application.” While the final rule generally prohibits contractual provisions limiting the liability of independent appraisers, auditors and accountants, contracts may provide for reimbursement of their legal expenses for defending third-party claims in certain limited situations.

The final rule increases the information applications must include and clarifies the confidentiality and public availability of the administrative record. Applicants must promptly notify DOL about material changes to facts or representations during the agency’s consideration of an application and after a PTE is granted.

Information required in PTE applications. To streamline the application process, DOL expanded the information required in PTE applications, which includes the following (among a larger list of items):

• Contact information for all involved parties in interest and their representatives
• Reasons for the transaction and any material benefits to the parties in interest involved
• Costs and benefits — quantified to the extent possible — to the plan and its participants
• A detailed description of possible alternatives considered by the applicant that don’t involve a prohibited transaction and why they weren’t pursued (DOL may deny an application for failure to consider and address reasonable alternatives)
• Each conflict of interest or instance of self-dealing covered by the PTE
• Any investigation or enforcement action by DOL, IRS or another regulatory authority focusing on the transaction
• Parties who will bear the costs of the exemption application and additional expenses associated with the transaction — including the expense of notifying interested parties (unlike the 2022 proposal, the final rule doesn’t include language expressly preventing the plan from paying these costs)
• Prior transactions between the plan or the plan sponsor and a party in interest involved in the transaction
• Representations regarding the selection of independent fiduciaries and appraisers — including that a fiduciary without material conflicts of interest prudently selected these vendors after diligent review of their technical training and proficiency — as well as copies of the contracts with the independent fiduciary and any independent appraiser, auditor, or accountant
• Other representations relating to the independence and responsibilities of the independent fiduciary and any independent appraiser, auditor, or accountant

Impartial conduct standards. PTE applications have to include a statement that the transaction meets impartial conduct standards — reflective of those in PTE 2020-02 on improving investment advice for workers and retirees — unless the applicant explains why those standards shouldn’t apply.

Notice and hearing. For PTE applications requesting relief from ERISA’s fiduciary self-dealing and conflict-of-interest prohibitions, any person who may be “materially affected” by a PTE has the right to a hearing. This right was previously available only to interested persons who were “adversely” affected by a PTE.

No confidentiality for administrative record. The entire administrative record — including presubmission information and oral statements — is open to the public once the application is submitted, even if it is later withdrawn. DOL won’t consider an application containing any information designated confidential.

In some instances, the applicant may request a PTE that provides retroactive relief for a transaction that already occurred. DOL will generally consider these applications only if the safeguards required for obtaining a PTE were in place at the time of the transaction, neither the plan nor its participants were harmed, and the applicant demonstrates that plan fiduciaries acted in good faith. As evidence of good faith, DOL will examine factors such as the involvement of an independent fiduciary to oversee and approve the transaction, a contemporaneous appraisal from a qualified independent appraiser or objective third-party pricing source, and use of a bidding process or fair market transactions with unrelated third parties.

The final rule allows DOL to issue a final denial of a PTE application without first issuing a tentative denial — generally where an applicant doesn’t include required information or respond in a timely manner — but allows for resubmission if the applicant cures the defects. To document the ultimate disposition, DOL will also issue a final denial upon an applicant’s withdrawal of a PTE application. In addition, DOL has discretion to revoke or modify a PTE — but only prospectively — for material changes in facts, circumstances or representations. An independent fiduciary’s resignation, termination, or criminal conviction is a material change, and the applicant must notify DOL within 30 days of these events.

• Final regulations (Federal Register, Jan. 24, 2024)
• Press release (DOL, Jan. 23, 2024)

• DOL proposes stricter standards for prohibited transaction exemptions (April 12, 2022)