The DOL adopted PTE 2020-02, Improving Investment Advice for Workers and Retirees ("PTE 2020-02"), effective as of February 16, 2021. PTE 2020-02 provides relief from the prohibited transaction rules for investment fiduciaries who provide advice to retirement plan sponsors and investors as well as IRAs. The DOL issued PTE 2020-02 to promote investment advice that is in the best interests of plan participants, beneficiaries, and IRA owners and to minimize conflicts of interest. PTE 2020-02 permits financial institutions and investment advisors to receive reasonable commissions, 12b-1 fees and mark-ups/downs and other payments in certain principal transactions.
To comply with PTE 2020-02, financial institutions and investment professionals must
- Acknowledge in writing to the investor that they are a fiduciary (the DOL provided model language for this purpose in the preamble to PTE 2020-02);
- Provide a written, accurate description of the services and disclosure of material conflicts of interest sufficient to allow a reasonable person to assess the scope and severity of such conflicts;
- Adhere to the Impartial Conduct Standards;
- Adopt policies and procedures to ensure compliance with the Impartial Conduct Standards and to minimize conflicts of interest;
- Document and disclose specific reasons that a rollover recommendation is in the investor's best interests and evidence of the consideration of all available alternatives to the rollover (including leaving the assets in the retirement plan and modifying the existing investment options available under that plan), fees and expenses associated with each alternative, whether the employer covers administrative expenses under the retirement plan, and the level of services available for all alternatives; and
- Perform an annual retrospective compliance review to identify possible violations of the established policies and procedures and prepare a report of the results which is certified by a senior executive officer of the financial institution.
For purposes of PTE 2020-02, the Impartial Conduct Standards are intended to protect consumers and ensure that financial institutions and investment professionals conduct themselves in a prudent manner and pursuant to the basic standards of fair dealing. To comply with the Impartial Conduct Standards, the advice given must be in the best interests of investors and the advisor must comply with the duties of prudence and loyalty in providing the advice. The investment advisor should not charge more than reasonable compensation for its services and should comply with the "best execution" requirements for investment transactions under the federal securities rules. Finally, the investment advisor should not make misleading statements about investment transactions and other relevant matters.
Financial institutions and investment professionals are not permitted to rely on PTE 2020-02 for 10 years after conviction of crimes relating to their provision of investment advice to retirement plan investors, or if they have exhibited a pattern or practice of violating the exemptions conditions, intentionally violated the exemption's conditions or provided misleading information to the DOL in any examination relating to their conduct.
The DOL's primary concern in issuing PTE 2020-02 is rollover recommendations provided by investment advisors to plan participants and beneficiaries, given the economic incentive for an investment advisor to recommend that plan participants and their beneficiaries roll assets from a retirement plan to an IRA maintained with their own financial institution. In the preamble to PTE 2020-02, the DOL clearly states that a rollover recommendation is covered as fiduciary advice to the extent such advice also meets the DOL's 5-part test set forth in the 1975 regulations for determining who is an investment advice fiduciary, which requires that the advice be part of an ongoing investment advice relationship (even if the rollover recommendation is the beginning of the relationship), be pursuant to a mutual agreement with the investor, be the primary basis for the investor's investment decision and be individualized based on the needs of the plan or the IRA.
PTE 2020-02 provides a correction procedure for violations of the requirements of the exemption by financial institutions. A financial institution may correct a violation of the exemption within 90 days after the financial institution learns of, or should have learned of, a violation; provided that the violation did not result in investment losses for the retirement investor or the financial institution made the investor whole. Within 30 days of the correction, the financial institution must notify the DOL and the person responsible for the annual retrospective review of the violation. The violation and correction must be specifically described in the annual retrospective review for the year in which it occurred.
The DOL considered delaying the effective date of PTE 2020-02 to allow time for further review and analysis; however, the DOL determined that the fundamental investor protections provided in PTE 2020-02 were of the utmost importance and should be implemented as scheduled. The DOL indicated that it will continue to evaluate and analyze the requirements of PTE 2020-02 and anticipates that it will take further action and issue additional guidance related to its regulation of fiduciary investment advice.
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