The New Fiduciary Rule (36): Confusion about Annual Retrospective Reviews

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE that may be used in all cases, and must be used in most cases, is PTE 2020-02. However, independent insurance agents may use PTE 84-24.

The Department of Labor has issued its final regulation defining fiduciary status for investment advice to retirement investors and the related exemptions for prohibited conflicts—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including recommendations of transfers and exchanges). The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

Unfortunately, that “split” of the effective dates has created a considerable amount of confusion about what needs to be done and when it needs to be done.

This article discusses one of those issues—the annual retrospective review and report.

The effective dates for the PTEs are as follows. The Impartial Conduct Standards and the Fiduciary Acknowledgement disclosure are effective September 23, 2024—this year. The remaining conditions in the PTEs are effective on September 23, 2025. That includes all of the remaining disclosures, the policies and procedures, and the annual retrospective review.

Sounds simple enough, right?

Not so fast.

When the requirement to conduct an annual retrospective review and to document it in a written report is effective on September 23, 2025, what period must be reviewed…all of 2024; all of 2025; both 2024 and 2025; September 23, 2024 to September 22, 2025; or September 23, 2025 and forward?

Good question, but what’s the answer?

Here’s what PTE 2020-02 says about the effective dates:

Section VI—Phase-In Period

During the one-year period beginning September 23, 2024, Financial Institutions and Investment Professionals may receive compensation under Section I of this exemption if the Financial Institution and Investment Professional comply with the Impartial Conduct Standards set forth in Section II(a) and the fiduciary acknowledgment requirement set forth in Section II(b)(1).

And here’s what PTE 84-24 says about the effective dates:

Section XI—Phase-In Period

During the one-year period beginning September 23, 2024, Independent Producers may receive compensation under Section II(b) of this exemption if the Independent Producer complies with the Impartial Conduct Standards set forth in Section VII(a) and the fiduciary acknowledgment set forth in Section VII(b)(1).

Basically, the same, right? The only difference is that, under PTE 2020-02 the firm and the individual have to satisfy the requirements, while under PTE 84-24 only the independent insurance agent has to satisfy the requirements.

While that is clear about what must be done, there isn’t an explicit statement about what doesn’t need to be done. We have to divine the answer by parsing the meaning of the effective date provisions.

There is a logical answer, and assuming that logic prevails (which it doesn’t always do), the answer is that the first annual retrospective review under the new and amended PTEs will be for the period beginning on September 23, 2025. Since most firms do their reviews on a calendar year, the first period would be from that September 23 to December 31, 2025.

How did I get there? The effective date provisions for the phase-in periods say that only the Impartial Conduct Standards and the fiduciary disclosure apply during the period from September 23 of this year to September 22 of next year (2025). That means that the other requirements don’t apply. That would include the retrospective review and report.

Viewed from the perspective of 84-24, that makes sense because insurance companies will not be getting information about compliance from the independent insurance agents. More specifically, those agents will not need to include any information with their applications for covered sales that would allow insurance companies to determine if their recommendations satisfied the conditions of the PTE (e.g., information about compliance with the Impartial Conduct Standards and delivery of the fiduciary acknowledgement).  What will the insurance companies review…if they don’t have anything to review?

It’s a bit more complicated under 2020-02 since both the firms and the individuals are fiduciaries. In that case, I can’t imagine that the firms aren’t going to be requiring documentation of compliance by the individuals (that is, the advisors and agents) in order to ensure that the firms’ fiduciary obligations are being satisfied. Nonetheless, other deferred provisions—for example, the policies and procedures—support the conclusion that the review requirement won’t start until September 23, 2025.

Since I am using logic, rather than relying on an explicit provision in the guidance, affected persons should get advice from their lawyers, rather than relying on this or other articles.

To further complicate matters, consider these questions. Is an annual retrospective review and report required for 2023 under the current PTE 2020-20? What about a review for the short period under the current PTE 2020-02 that ends September 22 of this year? These questions are also not answered explicitly. Ask your lawyer.

Concluding Thoughts

It is not uncommon to have unanswered questions about new rules. Hopefully, we will get answers from the DOL in due course. Unfortunately, the litigation about the regulation and PTEs will discourage the DOL from issuing additional guidance until the lawsuits are resolved.

During the meantime, the best we can do is to interpret the rules logically and reasonably. On the big questions—those where the downside is considerable—get legal advice from attorneys with experience on DOL matters. I know that sounds self-serving, but that doesn’t make it wrong.

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.