As anticipated, on October 25, 2021, the Department of Labor extended its previously adopted policy regarding delayed enforcement of Prohibited Transaction Exemption 2020-02 (“PTE 2020-02). This policy extension extended the deadline for enforcement of PTE 2020-02, allowing investment advisers who are investment advice fiduciaries additional time to comply with the exemption.
Sometimes referred to as “Fiduciary Rule 3.0,” PTE 2020-02 provides exemptions from the prohibited transaction rules for investment advice fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs). PTE 2020-02 allows an investment advice fiduciary to advise an ERISA Plan or an IRA and receive variable compensation. In this context, “variable compensation” means compensation that varies based on the advice provided, such as a commission. For example, even though an investment adviser will receive “additional fees” by recommending that a client or potential client roll over 401(K) assets into an IRA to be managed by the adviser as a fiduciary, such a recommendation will not be deemed a prohibited transaction if the requirements of PTE 2020-02 are met. In order to take advantage of PTE 2020-02, however, the adviser must meet several conditions, which we outlined in a blog post earlier this year.
In 2018, the DOL issued Field Assistance Bulletin (FAB) 2018-02, a temporary enforcement policy that explained the DOL would not pursue prohibited transaction claims, nor conclude that persons are violating the prohibited transaction rules if an investment advice fiduciary can demonstrate it worked in good faith and reasonable diligence to comply with “Impartial Conduct Standards” for transactions that would have been exempted under the previously vacated 2016 rule. Those impartial conduct standards include providing investment advice in the client’s best interest, receiving only reasonable compensation, and avoiding any materially misleading statements. FAB 2018-02 was set to expire on December 20, 2021.
The December 20, 2021, expiration date of FAB 2018-02 created practical problems for investment advisers that have begun the process of complying with the exemption conditions but have not yet completed all steps necessary for compliance. The chief problems identified by advisers were that the compliance date did not align with their usual schedule for making disclosures to clients, such as the natural date for amending and delivering Form ADV Part 2A. Additionally, firms complained that they wanted to complete the retroactive review requirement imposed by 20-02 on a calendar year basis, which would be complicated using a December 20, 2021, compliance date. The DOL noted these concerns in extending the deadline.
The recent Field Assistance Bulletin, FAB 2021-02, extended FAB 2018-02 by extending the enforcement date through January 31, 2022, for investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards, as long as the adviser (a) provides advice consistent with the standards of care relating to prudence and loyalty; (b) only charge reasonable fees that are consistent with the adviser’s best execution obligations; and (c) make no false or misleading statements regarding the recommendation, the transaction or other relevant issues.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.