Best Interest Standard of Care for Advisors #94: Maintenance of Documentation for Compliance with PTE 2020-02

Key Takeaways

The DOL’s expanded definition of fiduciary advice is described in the preamble to PTE 2020-02.

When conflicted fiduciary advice is given to retirement investors (that is, retirement plans, participants (including rollovers), and IRA owners), it results in prohibited transactions under the Internal Revenue Code and ERISA. But the PTE then provides relief for conflicted non-discretionary recommendations. However, the relief is only available if all of the PTE’s conditions are satisfied.

While much attention has been given to the “conditions” for obtaining the relief provided by PTE 2020-02, there hasn’t been much discussion of the PTE’s requirements to retain documentation of compliance with those conditions. This articles discusses those requirements.


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 ERISA retirement plans, participants (including rollover recommendations), and IRA owners (all of whom are referred to as “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 are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

For example, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest (i.e., the compensation earned from the rollover IRA) that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 provides relief, but only if all of its conditions are met.

Those conditions are:

  • Adherence to the Impartial Conduct Standards.
  • Providing the four required disclosures.
  • Adopting and implementing the required policies and procedures.
  • Conducting an annual retrospective review and recording the findings in a written report.

The first three requirements were effective on February 1 of this year, with the exception of the disclosure requirement to provide retirement investors, in writing, with the specific reasons why a rollover recommendation is in their best interest. That requirement applies beginning July 1, 2022. The 4th requirement—the annual retrospective review–begins next year, but the review is of compliance this year.

In addition to taking steps to comply with the four categories of requirements (or as the DOL calls them, “conditions”) for relief from the prohibited transaction rules, financial institutions are required to retain records that support compliance with those conditions.

For example, as a general record retention requirement, the PTE states:  The Financial Institution maintains for a period of six years records demonstrating compliance with this exemption and makes such records available, to the extent permitted by law including 12 U.S.C. 484, to any authorized employee of the Department [of Labor] or the Department of the Treasury.

With regard to the condition that financial institutions perform annual retrospective reviews, reduce the findings to a report, and have a senior executive officer certify the report, the PTE says:  The Financial Institution retains the report, certification, and supporting data for a period of six years and makes the report, certification, and supporting data available to the Department, within 10 business days of request, to the extent permitted by law including 12 U.S.C. 484.

It doesn’t stop with the DOL. In its recent Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors, the SEC staff said, with regard to rollover recommendations:  In the staff’s view, when making a rollover recommendation, it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for the recommendation.

The Staff Bulletin goes on to say:  Broker-dealers and investment advisers are subject to recordkeeping rules that may affect their decisions or obligations to document the basis for account recommendations.

Then the footnote to that sentence says: See Exchange Act rule 17a-4 (requiring broker-dealers to preserve, among other records, all communications sent or received relating to the firm’s business, including written communications with retail customers); Exchange Act rule 17a-3(a)(35)(i) (requiring broker-dealers to keep a record of all information collected from and provided to the retail customer pursuant to Reg BI, as well as the identity of each person who is an associated person responsible for the account); and Advisers Act rule 204-2(a)(7) (requiring investment advisers registered or required to be registered to retain all written communications related to any recommendation made or proposed to be made and any advice given or proposed to be given).

Concluding Thoughts

The DOL requirements are clear…documentation of the best interest process and the information assessed to comply with the Impartial Conduct Standards must be maintained for 6 years. For example, the information used for the comparison of the plan’s investments, services and expenses (and those characteristics of the IRA) should be maintained for at least 6 years, as well as other documentation of compliance with the conditions of the exemption.

The SEC requirements are similar, but perhaps not as comprehensive. Nonetheless, the SEC staff strongly suggests that records of compliance with the SEC’s guidance should also be retained to support recommendations of account types, including rollovers.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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