PTE 2020-02 is a prohibited transaction exemption under ERISA. It requires Financial Institutions, including RIAs, to meet several enumerated requirements, including adhering to the “Impartial Conduct Standards,” in order to rely upon the exemption with respect to certain transactions, including rollover recommendations. It also requires Financial Institutions to adopt policies and procedures to assure compliance with all of the substantive provisions of PTE 2020-02.
RIAs relying on PTE 2020-02 are required to conduct an annual retrospective review of their policies and procedures for compliance with PTE 2020-02. The retrospective review must be documented in a written report that is certified by a senior executive officer of the firm. The review must be reasonably designed to assist the RIA in detecting and preventing violations of the Impartial Conduct Standards and its policies and procedures governing compliance with PTE 2020-02.
The retrospective review must be completed at least annually and no later than six months following the end of the period covered by the review. A review covering the calendar year 2022 must be completed by or before July 1, 2023. For RIAs who adopted policies and procedures to comply with PTE 2020-02 on February 1, 2022, a review covering the period February 2022 to February 2023 must be completed no later than August 1, 2023.
For most RIAs who charge only a level fee for advisory services, the retrospective review will largely consist of reviewing the firm’s policies and procedures to comply with PTE 2020-02 when making rollover recommendations. This will include a review of the RIA’s rollover recommendation documentation to ensure it is being properly completed by investment adviser representatives. To the extent the CCO already reviews all or a sample of this documentation, it may be useful to have another senior officer of the firm review the documentation for any potential improvements.
The DOL has indicated that the retrospective review should involve testing a sample of transactions for compliance. The sample should be aimed at detecting compliance issues across a wide range of transaction types and sizes, both large and small. For example, if an RIA frequently recommends plan to IRA rollovers and IRA to IRA rollovers, the sample should include both types of rollovers. Similarly, rollovers of both small and large amounts should be represented in the sample. Any potential problems or deficiencies should be identified and steps should be taken to address those issues.
The retrospective review must be documented in a written report summarizing its results and methodology. That report must be provided to a Senior Executive Officer of the firm, which may be the Chief Compliance Officer, Chief Executive Officer, President, Chief Financial Officer or one of the three most senior officers of the RIA. The Senior Executive Officer must review the report and make certain certifications in writing, including that the firm’s policies and procedures are prudently designed to achieve compliance with PTE 2020-02. The DOL intended this requirement to be a means of creating accountability for the review.
In the event any serious failures or deficiencies are discovered during the review, the DOL included a self-correction mechanism in PTE 2020-02. The firm can avoid prohibited transaction consequences by correcting any failures within 90 days of discovery and reporting the failure and corrections to the DOL within 30 days of correction. The DOL can be notified via email to IIAWR@dol.gov. In order to be eligible for correction, the violation must not have resulted in investment losses to the retirement investor.
Any failures and corrections must be included in the report. The written report and certification, including any supporting data, must be maintained in the Firm’s records for a period of six years. The Firm must be prepared to make the report, certification and supporting data available to the DOL within 10 business days of request.
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.