The DOL’s expanded interpretation of fiduciary advice is described in the preamble to Prohibited Transaction Exemption (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.
The DOL’s fiduciary interpretation and the PTE and its requirements were not all effective at the same time, causing some confusion. This article discusses the four effective dates or, more appropriately, enforcement dates.
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 (including transfer recommendations)– all of whom are referred to as “retirement investors”. In addition, in the preamble to the PTE the DOL announced an expanded interpretation 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.
The First Effective Date: The Fiduciary Interpretation: February 16, 2021
The DOL “announced” its expanded interpretation of the 5-part test for fiduciary status for rollover recommendations in the preamble. In effect the DOL said that the re-interpretation had been its position since for some time. However, the DOL went on to say that it would not enforce that expanded interpretation until the effective date of the PTE, which was February 16, 2021. In that regard, the preamble says:
Nevertheless, in response to commenters expressing concern about the possibility of being held liable for past transactions that would not have been treated as fiduciary under the Deseret analysis, the Department will not pursue claims for breach of fiduciary duty or prohibited transactions against any party, or treat any party as violating the applicable prohibited transaction rules, for the period between 2005, when the Deseret Letter was issued, and February 16, 2021, based on a rollover recommendation that would have been considered non-fiduciary conduct under the reasoning in the Deseret Letter.
For this reason, and because the Department does not wish to disturb the reliance interests of those who looked to the Deseret Letter for guidance, the Department also does not expect or intend a private right of action to be viable for a transaction conducted in reliance on the Deseret Letter prior to that date.
In other words, any rollover recommendation made on or after February 16, 2021 was subject to the DOL’s expanded interpretation of fiduciary advice. In most cases, that means that, from the DOL’s perspective, those rollovers were fiduciary advice (if they otherwise satisfied the expanded 5-part test) and the commissions or fees earned from the rollover IRAs were prohibited transactions.
The Second Effective Date: Good Faith Compliance Required: February 16, 2021
Fortunately, while the enforcement date for the fiduciary definition was not extended beyond February 16, 2021, the “good faith” period for complying with the conditions in PTE 2020-02 was. In the preamble, the DOL also said:
Further, the extension of the temporary enforcement policy in FAB 2018–02 until its expiration on December 20, 2021 will allow parties a transition period during which the Department will not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with the Impartial Conduct Standards for rollover recommendations or treat such fiduciaries as violating the applicable prohibited transaction rules.
In other words, if a financial institution and its investment professionals worked “diligently and in good faith to comply with the Impartial Conduct Standards for rollover recommendations”, they would not need to comply with the other conditions in PTE 2020-02 until December 21, 2021. However, it’s important to keep in mind that the Impartial Conduct Standards include the best interest standard of care. That means that, beginning February 1, 2021, financial institutions and investment professionals needed to engage in a prudent and loyal process when recommending rollovers or IRA transfers. There doesn’t seem to be an exception to the requirement to have information about the plan or IRA investments as a part of the best interest process, unless the “diligent and good faith” language could reasonably be interpreted in that way.
That “enforcement policy” was later extended by FAB 2021-02 until (i) January 31, 2022 for all of the PTE’s conditions except the “specific reasons” requirement, which was (ii) extended to June 30, 2022.
The Third Effective Date: Literal Compliance: February 1, 2022
The enforcement policy expired on January 31, 2022 (except for the specific reasons for rollover recommendations). As a result, beginning February 1, 2022 financial institutions and investment professionals who provide fiduciary investment advice (including rollover recommendations) need to satisfy the conditions in PTE 2020-02 in order to avoid prohibited transactions resulting from their recommendations. The conditions that became “enforceable” on February 1, 2022 include:
- Adherence to the Impartial Conduct Standards, including the best interest standard of care.
- Delivery of disclosures: fiduciary acknowledgment, conflicts and services.
- Policies and procedures: mitigation of conflicts and adherence to Impartial Conduct Standards.
- Annual retrospective review.
The Fourth Effective Date: Providing Specific Reasons for Rollovers: July 1, 2022
As explained in FAB 2021-02:
In addition, from December 21, 2021 through June 30, 2022, the Department will not pursue prohibited transactions claims against investment advice fiduciaries who are otherwise in compliance with PTE 2020-02 based solely on their failure to comply with the disclosure and documentation requirements set forth in Sections II(b)(3) and (c)(3) of that exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.
The cross-reference is to: Prior to engaging in a rollover recommended pursuant to the exemption, the Financial Institution provides the documentation of specific reasons for the rollover recommendation,…
Stated simply, the requirement to provide participants or IRA owners with the specific reasons why a rollover recommendation or an IRA transfer recommendation is in their best interest becomes enforceable on July 1, 2022.
These “effective” or “enforcement” dates have come and gone. The fiduciary interpretation and the conditions of the exemption are fully applicable. In that sense, this is an article about recent history.
However, broker-dealers, investment advisers and other financial institutions claiming the relief provided by PTE 2020-02 should consider their practices over the past year and a half and determine if they were in compliance at the appropriate times. If mistakes are discovered, they should consider the self-correction process in PTE 2020-02. Otherwise, the compensation earned from the noncompliant recommendations is prohibited and should be restored to the retirement account (e.g., plan, participant account, or IRA).
In addition, any post-January 31, 2022 failures to satisfy the PTE’s conditions will be subject to the annual retrospective review and report. My suspicion is that, once the DOL starts it investigations, one of its initial forays will be to obtain reports from a number of financial institutions. While that may be a survey-type investigation, the DOL will undoubtedly find failures and will require that they be corrected, including the implementation of compliant processes, disclosures and/or policies and procedures. That would be to resolve isolated failures. For larger scale failures, the consequences would likely be more severe.
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