Our Chief Compliance Officer has put together a summary of the fiduciary advice exemption PTE 2020-02 for our own Wealth Managers. PTE 2020-02 provides an exemption from the prohibited transaction rules for investment advisor fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs). Please consult your compliance consultant for more information.
Background: In general, a Prohibited Transaction Exemption (PTE) is a Department of Labor (DOL) ruling that a transaction is allowable or permitted under the Employee Retirement Income Security Act of 1974, as amended (ERISA), regulations. ERISA Title I and the Internal Revenue Code of 1986, as amended (IRC), prohibit a party providing fiduciary investment advice to plan sponsors, plan participants, and Individual Retirement Account (IRA) owners from receiving broadly defined compensation creating conflicts of interest, unless they comply with protective conditions in a PTE.
PTE 2020-02: On December 15, 2020, the DOL issued class exemption PTE 2020-02, Improving Investment Advice for Workers & Retirees. PTE 2020-02 expands the definition of fiduciary advice, which causes many more rollover recommendations to be considered fiduciary advice. The DOL’s position is that a recommendation to roll over from an ERISA plan or IRA may be considered fiduciary investment advice depending on whether a five-part test is met. Thus, this would preclude “investment advice fiduciaries” to IRAs and employee benefit plans to receive certain otherwise prohibited compensation. At the same time, this new PTE also allows such compensation under certain circumstances.
Compliance: To comply with PTE 2020-02, an investment advice fiduciary must:
(1) provide advice in accordance with the Impartial Conduct Standards, which specifically requires investment advice fiduciaries to act in a certain way, including them to:
(a) give advice that is in the “best interest” of the retirement investor, which must meet a specified professional standard of care;
(b) act under the standard of loyalty standard; and
(c) charge reasonable compensation.
As expected, to comply with the Impartial Conduct Standards, an investment advice fiduciary may not make any misleading statements about investment transactions and other relevant matters.
(2) provide a proscriptive written acknowledgement of the firm’s and the investment professional’s fiduciary status under Title I of ERISA and the IRC when providing covered recommendations to a retirement investor;
(3) provide written description of the services to be provided to the retirement investor, and the financial institution and investment professional’s material conflicts of interest;
(4) provide a retirement investment documentation of reasons that a rollover recommendation is in the best interest of the retirement investor;
(5) adopt written Impartial Conduct Standards policies and procedures, which mitigate conflicts of interest; and
(6) conduct an annual PTE 2020-02 compliance review.
Certain “bad actors” are excluded from use of this PTE.
Timing: PTE 2020-02 has had numerous delays but finally “goes into effect” in 2022. For all requirements except requirements (2)-(4) above, DOL will not enforce compliance until January 31, 2022. For the roll-over acknowledgement and documentation, (requirements (2)-(4) above), the DOL will not require compliance until June 30, 2022.
Miscellaneous: The DOL Q&A dated April 2021 (link below) provides specific detail on compliance. For example, in Q&A #14, the DOL notes that the disclosure form “cannot be merely a “check-the-box” activity.” Complete this disclosure such that a reasonable person could assess the range and severity of any possible conflicts of interest. Meaningful information must be provided to retirement investors such that they can make decisions about their investments. The link to the DOL Q&A (but note that some compliance dates have been revised): https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption
Congress Wealth Management LLC (“Congress”) is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or training. For additional information, please visit our website at congresswealth.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Congress’ CRD #310873.
This note is provided for informational purposes only. Congress believes this information to be accurate and reliable but does not warrant it as to completeness or accuracy. This note may include candid statements, opinions and/or forecasts, including those regarding investment strategies and economic and market conditions; however, there is no guarantee that such statements, opinions and/or forecasts will prove to be correct. All such expressions of opinions or forecasts are subject to change without notice. Any projections, targets or estimates are forward looking statements and are based on Congress’ research, analysis, and assumption. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. This note is not a complete analysis of all material facts respecting any issuer, industry or security or of your investment objectives, parameters, needs or financial situation, and therefore is not a sufficient basis alone on which to base an investment decision. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this note. No portion of this note is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Investing entails the risk of loss of principal.
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