Best Interest Standard of Care for Advisors #63: Compliance with PTE 2020-02: Acknowledgement of Fiduciary Status

The DOL “Fiduciary Rule,” FAQ 13: Written Acknowledgement of Fiduciary Status

This series focuses on the DOL’s new fiduciary “rule”, which was effective on February 16. This, and the next several, articles look at the Frequently Asked Questions (FAQs) issued by the DOL to explain the fiduciary definition and the exemption for conflicts of interest.

Key Takeaways

  • The DOL FAQs generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
  • FAQ 13 explains the DOL’s reasons for requiring that financial institutions and investment professionals provide retirement investors with a written acknowledgement of their status as fiduciaries for their recommendations.
  • The Impartial Conduct Standards, which do not require the declaration of fiduciary status, must be satisfied from February 16, 2021 until December 20, 2021 under the DOL’s non-enforcement policy (with concurrence by the IRS), and then on December 21, all of the conditions of PTE 2020-02 must be satisfied, including the fiduciary acknowledgement.

Background

The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees) allows investment advisers, broker-dealers, banks, and insurance companies (“financial institutions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to retirement plans, participants and IRA owners (“retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals will be fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

In April, the DOL issued FAQs that explain the fiduciary interpretation and the conditions of the exemption.

This article discusses FAQ 13, a DOL question and answer about the requirement for the delivery of a written acknowledgement of fiduciary status:

Q13. Why did the Department require financial institutions and investment professionals to provide retirement investor customers with a written acknowledgement of their status as fiduciaries under Title I of ERISA and the Code?

The written fiduciary acknowledgment is designed to ensure that the fiduciary nature of the relationship under Title I of ERISA and/or the Code is clear to the financial institution and investment professional, as well as the retirement investor, at the time of the recommended investment transaction. This requirement reflects the Department’s view that parties wishing to take advantage of the broad prohibited transaction relief in the new exemption should make a conscious up-front determination that they are acting as fiduciaries; tell their retirement investor customers that they are rendering advice as fiduciaries; and, based on their decision to act as fiduciaries, implement and follow the exemption’s conditions. In assessing compliance with this condition, the Department expects financial institutions and investment professionals to be clear about their fiduciary status with respect to any transaction for which they are relying on the exemption. Ambiguous statements of fiduciary status that would leave a reasonable investor unsure of whether any particular recommendation is rendered in a fiduciary capacity under Title I of ERISA or the Code are insufficient.

To assist financial institutions and investment professionals in complying with this condition of the exemption, the exemption preamble included the following model language that will satisfy the fiduciary acknowledgment requirement:

When we provide investment advice to you regarding your retirement plan account or individual retirement account, we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours. Under this special rule’s provisions, we must:

  • Meet a professional standard of care when making investment recommendations (give prudent advice);
  • Never put our financial interests ahead of yours when making recommendations (give loyal advice);
  • Avoid misleading statements about conflicts of interest, fees, and investments;
  • Follow policies and procedures designed to ensure that we give advice that is in your best interest;
  • Charge no more than is reasonable for our services; and
  • Give you basic information about conflicts of interest.

To be clear, this is suggested language from the DOL. In a sense, it could be viewed as a “safe harbor” acknowledgement. However, this language includes much more than is required by PTE 2020-02. For example, the suggested acknowledgement goes into some detail about what fiduciary status means. That is not required by the PTE itself. As a result, financial institutions may consider drafting simpler and more direct statements of their fiduciary status. On the other hand, when the DOL provides sample language, there may be a benefit to using it, for example, if a DOL investigation occurs in the future, the investigator will readily recognize and accept this language.

Concluding Thoughts

First and foremost, broker-dealers and investment advisers should be prepared to provide a written acknowledgement of fiduciary status (under ERISA and the Code) to retirement investors beginning December 21, 2021. They can use the DOL form language or draft their own, so long as it satisfies of PTE 2020-02.

However, broker-dealers and investment advisers probably should not rely on their current disclosure documents, such as Reg BI disclosures, Forms CRS, or Form ADV. There is nothing in the SEC’s guidance for those disclosures that would be the equivalent of the fiduciary disclosure under PTE 2020-02. For example, the PTE requires disclosure as a fiduciary under Title I of ERISA and/or under the Internal Revenue Code. A disclosure of fiduciary status under the securities laws is about a different status subject to a different set of rules. Prohibited transaction exemptions typically require strict adherence with their conditions.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.

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