In connection with its recently proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), the U.S. Department of Labor (DOL) also released a proposed amendment to PTE 2020-02: Improving Investment Advice for Workers & Retirees.
Under PTE 2020-02 Financial Institutions and Investment Professionals, which includes investment advisers and their representatives, can receive compensation for recommending certain transactions to Retirement Investors (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) which would otherwise violate the prohibited transaction rules under ERISA and the Code.
Requirements include complying with certain Impartial Conduct Standards (i.e., providing advice that is in the best interest of the Retirement Investor, receiving only reasonable compensation, and avoiding materially misleading statements), providing certain disclosures, adopting policies and procedures, conducting an annual retrospective review, and maintaining records of compliance for six years.
The DOL’s proposed amendment builds upon these existing conditions by proposing additional disclosures to be provided by Financial Institutions to Retirement Investors prior to engaging in a transaction under PTE 2020-02. The DOL is also proposing changes to the annual retrospective review requirement, specifically to the certifications the Senior Executive Officer of the Financial Institution is required to make. Lastly, the DOL is proposing certain changes to the PTE 2020-02 exclusion and eligibility requirements, as well as a few other clarifying revisions throughout.
Under the current PTE 2020-02, Financial Institutions are required to provide the following disclosures prior to engaging in a transaction under the exemption: 1) written acknowledgement of fiduciary status under Title I of ERISA and the Code, as applicable; 2) written description of services to be provided and any material conflicts of interest; and 3) documentation of specific reasons any rollover recommendations are in the Retirement Investor’s best interest.
The DOL proposed adding a requirement that a written statement of the Best Interest standard of care owed by the Financial Institution be provided to the Retirement Investor. The DOL also proposed adding a requirement that Financial Institutions inform Retirement Investors of their right to obtain specific information regarding costs, fees, and compensation. The disclosure must describe how the Retirement Investor can obtain this information free of charge. The DOL provided model language to satisfy these two proposed requirements in its proposal.
The DOL is further proposing adding a requirement that the description of services include a statement on whether and how the Retirement Investor will pay for such services, including directly or indirectly through third-party payments. The DOL did not provide model language for this disclosure as it will vary by Financial Institution. The DOL reiterated that these disclosure requirements can be satisfied in part through disclosures required by other regulators, such as the Form ADV.
The DOL is also considering web-based disclosures. The DOL sought comments on whether Financial Institutions should be required to maintain a public website containing the pre-transaction disclosures, associated conflicts of interest, and a typical schedule of fees, among other things. If the DOL decides to add this web disclosure requirement, a link to the web disclosure would need to be provided to Retirement Investors as part of the pre-transaction disclosures.
The DOL is proposing to amend its rollover recommendation disclosure requirement to include the list of relevant factors Financial Institutions and Investment Professionals must consider and document when making a rollover recommendation. Previously the DOL had listed these factors in its guidance but opted against including them in the rule. The proposed factors are largely the same as the DOL’s previous guidance, with a few minor differences.
The DOL is proposing a good faith error or omission exemption that will protect Financial Institutions from failing to satisfy the disclosure obligations of DOL PTE 2020-02 if it discloses the correct information as soon as practicable, but no later than 30 days from the date of discovery. The Financial Institution must also have been acting in good faith and with reasonable diligence. If adopted, this will be a welcome addition to PTE 2020-02, and will also mirror the good faith error or omission exemption provided under DOL Rule 408b-2(c) for plan service provider disclosures.
Under the current PTE 2020-02, Financial Institutions are required to establish, maintain, and enforce written policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and mitigate conflicts of interest. The proposed amendment clarifies that obligation by adding examples of certain actions Financial Institutions should not take (e.g., quotas, appraisals, bonuses, special awards, or other similar incentives).
The DOL is retaining the annual retrospective review requirement, with a few proposed clarifications and modifications. As part of the annual retrospective review the current PTE 2020-02 requires the Financial Institution’s Senior Executive Officer to certify, among other things, that the Financial Institution has policies and procedures in place prudently designed to achieve compliance with the Impartial Conduct Standards and PTE 2020-02.
The DOL is proposing to amend this requirement to require the Senior Executive Officer to certify that the Financial Institution has filed, or will file in a timely fashion, Form 5330 with the IRS to report any non-exempt prohibited transactions discovered by the Financial Institution during its retrospective review. The Senior Executive Officer will also have to certify that the Financial Institution has corrected those transactions and paid any resulting excise taxes. If adopted, this will effectively require Financial Institutions to report any non-exempt prohibited transactions to the IRS.
The DOL is proposing a few clarifications to the eligibility provisions of PTE 2020-02, including replacing the term “Controlled Group” with the more commonly understood term “Affiliates.” The DOL is also proposing to add ineligibility for systematically failing to correct and report non-exempt prohibited transactions to the IRS on Form 5330 and pay resulting excise taxes. The DOL noted that a single missed instance of excise tax would not lead to ineligibility, but regularly disregarding that legal obligation will render PTE 2020-02 unavailable for a ten-year period.
The current PTE 2020-02 excludes certain persons or transactions from relying on PTE 2020-02. The DOL is proposing to remove the exclusion for robo-advisors, or Financial Institutions that provide investment advice generated solely by a computer model based on information inputted by the Retirement Investor, without any involvement of an Investment Professional. The DOL determined that while the statutory exemption under ERISA 408(b)(14) and (g) directly addresses computer-generated investment advice, many Financial Institutions may offer advice through both computer models and individual Financial Professionals and may prefer to have consistent policies and procedures across all recommendations.
The DOL is currently in the process of reviewing comments on its proposed rule, which were due on January 2, 2024.
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 PTE 2020–02, 85 FR 82798, 82830 (Dec. 18, 2020).