Advisor Best Interests Standard of Care #83: Compliance with PTE 2020-02: Exemption Application | Faegre Drinker Biddle & Reath LLP
The “fiduciary rule” of the Ministry of Labor, PTE 2020-02: the FAQ
This series focuses on the DOL’s new fiduciary “rule,” which went into effect on February 16. This article, and the following ones, examine the Frequently Asked Questions (FAQs)) issued by the DOL to explain the fiduciary definition and the conflict of interest exemption.
Key points to remember
The DOL has published an FAQ that generally explains PTE 2020-02 and the expanded definition of fiduciary boards.
- In FAQ 21, the DOL explained how it would enforce the exemption.
- As a starting point, the DOL has the authority to interpret and apply the requirements of the TEP as they apply to pension plans, including recommendations for participants to withdraw their benefits from a pension plan and to switch to an IRA.
- In addition, under ERISA there are private rights of action for breach of fiduciary duties to plans and participants, including rollover recommendations.
- Also, while the DOL has no investigative or enforcement authority for violations of the terms of the exemption for non-ERISA vehicles, such as IRAs, if it finds such violations, it will return them. at the IRS.
DOL’s Prohibited Transactions Exemption (PTE) 2020-02 (Improved Investment Advice for Workers and Retirees) allows investment advisers, broker-dealers, banks and insurance companies (“financial institutions”) and their representatives (“Investment Professionals”), to receive conflicting compensation resulting from non-discretionary fiduciary investment advice to ERISA pension plans, participants (including rollover recommendations), and IRA owners (“retirement investors”). In addition, in the preamble to the PTE, the DOL announced an expanded definition of fiduciary advice, which means that many more financial institutions and investment professionals are fiduciaries for their recommendations to pension investors and, by therefore, will need the protection afforded by the exemption.
The DOL has published an FAQ providing additional guidance on the PTE 2020-02 requirements. In question 21, the DOL asks and answers how it will ensure compliance with the exemption.
Q21. How will the Ministry enforce the exemption?
The Department has the authority to investigate and interpret regarding compliance with exemptions. For plans covered by ERISA Title I, the Department will investigate compliance with the exemption and apply Title I protections. Action under Section 502 of ERISA for Fiduciary Breaches and Prohibited Transactions. For IRAs and other non-Title I plans, the Department has the interpretive authority to determine whether the conditions for exemption have been met and forwards the information to the IRS for excise tax enforcement. Unlike the 2016 regulations, the new exemption does not impose contract or collateral requirements on financial institutions or investment professionals responsible for compliance. The exemption also does not expand the ability of pension investors to enforce their rights in court or create new legal claims beyond those of Title I of ERISA and the Code.
The exemption also includes several provisions intended to support and encourage compliance. In addition to the annual retrospective review and self-correction discussed in previous FAQs, the exemption also encourages compliance by setting out the circumstances under which financial institutions and investment professionals may become ineligible to rely on the exemption. exemption for a period of 10 years. Parties may become ineligible as a result of conviction for specified crimes, or if they have engaged in a systematic or intentional violation of the terms of the exemption or have provided materially misleading information to the Department regarding their conduct under the exemption. .
The response begins by pointing out that the DOL has the right to investigate and enforce fiduciary breaches and failures to meet the terms of the prohibited transaction exemptions for ERISA-governed plans. DOL investigations are often based on reviews of Form 5500s. The first 5500 for 2022 (when the PTE is first enforceable by the DOL) will be due July 1, 2023. Investigations typically begin about a year after filing forms. Thus, the first surveys based on 5500 will probably take place in the summer of 2024.
However, investigations can also be opened for other reasons. For example, a Participant or Trustee complaint filed with the DOL may result in an investigation.
There is at least a chance that the DOL will make “investigative” inquiries into the reports of the initial retrospective annual reviews. The deadline for 2022 reviews and reports is June 30, 2023. It is therefore possible that the DOL will request these reports from certain “financial institutions” in the second half of 2023.
Because ERISA provides private rights of action for plans, participants, and the DOL, compliance failures can also be sanctioned by lawsuits, which should be of concern to brokers, investment advisers, and others. financial institutions.
The response goes on to explain that the DOL does not have enforcement jurisdiction over IRAs and non-ERISA plans (for example, solo 401(k)s), but if it finds violations, it will refer those violations to the IRS, which has enforcement jurisdiction over IRAs and non-ERISA plans. An obvious question is, how would the DOL find violations if it is not investigating financial institutions for conflicts and IRA practices? This would most likely be to obtain copies of the annual retrospective review reports.
There are also concerns that the SEC and FINRA are reviewing their supervised entities’ compliance with the policies and procedures required by TEP 2020-02.
The Answer concludes by evoking “the nuclear option”. That is, the DOL can revoke access to the PTE if it finds gross violations of the PTE. If the availability of PTE relief is removed, the financial institution and its investment professionals could not recommend plan-to-IRA rollovers, IRA-to-IRA transfers, and a host of other conflicting transactions for accounts. retirement for a period of 10 years. It could be enough to put a business out of business or lead to the loss of key professionals.
By its very nature, enforcement tends to begin a few years after a rule comes into force. Although it may seem far in the future, companies should not be comforted by this delay. The consequences of failure could be significant. For example, the DOL’s view on correcting a breach is to restore the money, plus interest, to the retirement account. If the lack of compliance is systemic (i.e. a failure that cuts across many recommendations, for example, a failure to disclose), the resulting violations could be significant and the necessary corrections could be costly.
Now that the DOL non-enforcement policy is complete, it would be a good idea to revisit the terms of the exemption and review the policies and practices put in place to comply with it. In my experience, in the rush to meet a deadline, good faith “solutions” can be put in place knowing that they need to be improved upon later. Unfortunately, the good faith period expired on February 1 and literal compliance is now expected.