Fiduciary Rule

While the majority of the Department of Labor’s new fiduciary rule, Prohibited Transaction Exemption 2020-02 (“PTE 2020-02), became enforceable on January 31st, some of the requirements pertaining to rollover recommendations are set to be enforced on July 1, 2022.

As detailed in this blog post, the DOL provided transition relief in its Field Assistance Bulletin, FAB 2021-02 by extending the enforcement date of PTE 2020-02 through January 31, 2022 for investment advice fiduciaries who are working diligently and in good faith to comply with the “Impartial Conduct Standards” for any transactions that are exempted under PTE 2020-02. These standards include a best interest standard, a reasonable compensation standard, and a requirement to avoid any materially misleading statements about the recommended transaction and other relevant matters.

PTE 2020-02 also requires investment advice fiduciaries to document the specific reasons any rollover recommendations from an employee benefit plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another is in the best interest of the retirement investor. PTE 2020-02 further requires this documentation to be provided to the retirement investor prior to engaging in the rollover. In FAB 2021-02, the DOL announced that it would not enforce the documentation and disclosure requirements for rollover recommendations under PTE 2020-02 through June 30, 2022.
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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.

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