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The New Fiduciary Rule (20): Requirement to Correct Failures with PTE Conditions (Part 2)

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. Where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02, in order for the advisor or agent to receive any compensation, e.g., from the rollover IRA or annuity.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found in the review, it must be corrected.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and the recommendation is about the investment of “qualified” or retirement accounts (as that is defined in the proposed regulation). Some of the covered investment recommendations include:  investing in securities, annuities or other property; rollovers; IRA transfers; withdrawals from retirement accounts; and investment strategies, policies and allocations.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor).

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The New Fiduciary Rule (19): Requirement to Correct Failures with PTE Conditions (Part 1)

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The DOL’s proposed fiduciary regulation defines fiduciary recommendations to include, among other things, one-time advice where specified conditions are satisfied.
  • That expansive definition will cause many more advisors and insurance agents to be fiduciaries for their recommendations and, where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, the protection of an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found in the review, it must be corrected or the benefit provided by the exemptions will be lost.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and which falls into one of the three defined categories in the proposed regulation. Those categories include, for example, recommendations about investing in securities or annuities, rollovers, IRA transfers, withdrawals from retirement accounts, and investment strategies, policies and allocations.

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PTE 2020-02: The Remaining Steps: Retrospective Review and Correction of Compliance Failures (Part 1)

Key Takeaways

    • The next step in compliance with the DOL’s PTE 2020-02 is to conduct the annual retrospective review for 2022 and to reduce the review to a written report to be signed by a “senior executive officer.”
    • The review and report must be completed within 6 months after the end of the year.
    • In the process of conducting the review, it is likely that compliance failures will be discovered. To avoid prohibited transaction consequences, the failures must be corrected within 90 days of discovery and reported to the DOL within 30 days of correction.
    • The failures and corrections must also be included in the report.
    • There are a number of types of potential failures, some of which may be easy to correct and others of which will be more difficult.
    • Unfortunately, the DOL did not provide any guidance on how to correct failures. As a result, careful thought—with competent legal advice—should be given to the correction methodology.

Now that 2022 is behind us, the final steps in compliance with PTE 2020-02 must be satisfied. Those steps are (i) conducting the annual retrospective review and the resulting report (within six months) and (ii) correcting any compliance failures that are discovered in the course of the review.

The Review and Report are conditions to obtaining the relief afforded by the exemption. In other words, if they are not properly completed the protection is lost and all conflicted recommendations under the PTE are considered to be prohibited transactions. The consequence of having hundreds or even thousands of prohibited transactions is unimaginable. Here’s what the PTE says about the Retrospective Review and Report:

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Best Interest Standard of Care for Advisors #93: Correction of Failures to Satisfy 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 its conditions are satisfied.

Unfortunately, we are already seeing that some broker-dealers and investment advisers have not fully complied with the exemption’s conditions, at least in connection with some of their recommendations.

That raises the question of “What are the consequences of those failures?” This article discusses the failures, corrections, reporting to the DOL, and inclusion of the failures in the annual retrospective review and report.

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 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 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.

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