DOL Issues FAQs on Fiduciary Investment Advice PTE 2020-02

Practical Law Legal Update w-030-5904 (Approx. 5 pages)

DOL Issues FAQs on Fiduciary Investment Advice PTE 2020-02

by Practical Law Employee Benefits & Executive Compensation

FAQs

The FAQs cover different aspects of compliance with the new PTE 2020-02, which are discussed below.

Timing

Regarding the timing of the new PTE and the sunset of prior guidance, the FAQs confirm that:

PTE 2020-02 became effective on February 16, 2021, as scheduled.
FAB 2018-02 will remain in place until December 20, 2021, as set forth in PTE 2020-02. FAB 2018-02 provided a temporary enforcement policy under which the DOL would not pursue prohibited transaction claims against investment advice fiduciaries who comply with the impartial conduct standards for transactions that would have been exempted in the best interest contract (BIC) exemption and principal transactions exemption (see Legal Update, FAB 2018-02 Announces Temporary Enforcement Policy for the DOL's Fiduciary Rule).

Enforcement Policy

The FAQs state that the DOL will not delay the application of its interpretation related to rollover recommendations. The DOL will respect but not extend the enforcement policy set forth in PTE 2020-02, under which the DOL would not:

Pursue claims for breaches of fiduciary duty or prohibited transactions for the period between 2005 (when Advisory Opinion 2005-23A, also known as the Deseret Letter, was issued) and February 16, 2021 (the effective date of PTE 2020-02).
Treat parties as violating the prohibited transaction rules, based on rollover recommendations that would have been considered non-fiduciary conduct under the Deseret Letter.

Five-Part Test

The FAQs include guidance on the regulatory definition of an investment advice fiduciary, commonly known as the five-part test or 1975 test (29 C.F.R. § 2510.3-21). Specifically, the FAQs explain that the "regular basis" prong of that test is:

Not satisfied when there is a single, discrete instance of advice to roll over assets from a retirement plan to an IRA.
Satisfied when advice to roll over plan assets occurs as part of an ongoing relationship or as the beginning of an intended future ongoing relationship that an individual has with an investment advice provider.

Regarding whether an investment advice provider can avoid fiduciary status with a fine print disclaimer that no mutual agreement, arrangement, or understanding exists between the parties, the FAQs explain that such written statements may be considered in determining whether a mutual understanding exists, but will not be treated as determinative.

Requirements of PTE 2020-02

The FAQs reiterate and elaborate on the requirements of PTE 2020-02. Specifically, financial institutions are to comply with PTE 2020-02 by:

Providing advice that meets the impartial conduct standards, which are factors set forth in PTE 2020-02 that investment advice fiduciaries must comply with when providing advice (see Legal Update, DOL Finalizes Fiduciary Investment Advice PTE 2020-02).
Acknowledging in writing their and their investment professionals' fiduciary status when providing investment advice to retirement investors.
Describing in writing:
- the services to be provided; and
- financial institutions' and investment professionals' material conflicts of interest, which must be provided before providing advice to the investor.
Documenting the reasons that a rollover recommendation is in the best interest of the retirement investor and providing that documentation to the retirement investor. According to the FAQs, these factors must be considered and documented in this disclosure:
- the alternatives to a rollover;
- the fees and expenses associated with both the employer-sponsored retirement plan and the IRA;
- whether the employer pays for some or all of the plan's administrative expenses; and
- the different levels of services and investments available under the plan and the IRA.
Adopting policies and procedures prudently designed to ensure compliance with the impartial conduct standards and that mitigate conflicts of interest. The FAQs provide guidance on this requirement, particularly in regard to conflicts of interest. They state that financial institutions' policies and procedures must be prudently designed to, among other things, protect retirement investors from recommendations to make excessive trades, to buy investment products, annuities, or riders that are not in the investor's best interest, or to allocate excessive amounts to illiquid or risky investments.
Conducting an annual retrospective review of compliance. According to the FAQs, the DOL expects financial institutions to use the results of the review, which will be discussed in a written report that is provided to one of the financial institution's senior executive officers, to find more effective ways for investment professionals to comply with the impartial conduct standards and to correct any deficiencies in existing policies and procedures. Additionally, senior executive officers should carefully review the report before making the required certifications.

The FAQs also discuss enforcement of PTE 2020-02.

Insurance Companies

The FAQs also provide extensive guidance on how insurance industry financial institutions can comply with PTE 2020-02. The FAQs state that PTE 2020-02 requires insurance companies to:

Adopt and implement prudent supervisory and review mechanisms to safeguard insurance agents' compliance with the impartial conduct standards when recommending the insurance company's products.
Avoid improper incentives to preferentially recommend the products, riders, and annuity features that are most lucrative for the insurance company at the customer's expense.
Ensure that the insurance agent receives no more than reasonable compensation for his or her services.
Follow the disclosure and other requirements in the exemptions.

Future Guidance

According to the FAQs, the DOL is reviewing issues related to PTE 2020-02 as well as the fiduciary investment advice regulation. The DOL anticipates taking further regulatory and sub-regulatory actions, including amending:

The investment advice fiduciary regulation.
PTE 2020-02.
Or revoking some of the other existing class exemptions for investment advice fiduciaries.

Practical Implications

Financial institutions, investment advisers, and other potential investment advice fiduciaries should carefully review the DOL's FAQs on PTE 2020-02, which may help them determine whether they want to rely on the exemption, and if they choose to rely on it, how to do so.

DOL Issues FAQs on Fiduciary Investment Advice PTE 2020-02 | Practical Law