The effective date of the DOL’s new expansive fiduciary rule and the amendments to Prohibited Transaction Exemption (PTE) 2020-02 has been stayed pending the outcome of the lawsuits challenging the rule and the amended PTE.
However, broker-dealers and their registered representatives (advisors) may still be fiduciaries under the current DOL fiduciary rule when recommending rollovers and may need to comply with the current version of PTE 2020-02 to receive the management fee that results from the rollover recommendation. This blog post describes circumstances when compliance with the PTE may be needed and the PTE conditions that apply now.
When Should PTE 2020-02 Compliance be Considered
As we discussed in our recent blog post (“ ”), under the current DOL fiduciary rule, an advisor who has a pre-existing fiduciary relationship with a plan and who recommends a rollover will likely be considered a fiduciary by the DOL. That could be the case, for example, if an advisor is a fiduciary by virtue of recommending and monitoring a plan’s investment lineup or if an advisor is a fiduciary because the advisor manages a participant’s account in a plan.
It is also possible that the DOL will consider the recommendation of an IRA-to-IRA transfer to be a fiduciary act under the current DOL fiduciary rule. For example, if an advisor recommends to an IRA owner that he or she transfer an IRA to the advisor’s firm, the DOL could (perhaps likely would) assert that the transfer recommendation is connected to subsequent investment recommendations about investing the IRA in order to satisfy the “regular basis” part of the current rule’s five-part test. While a Florida federal district court held that a plan and an IRA could not be connected to satisfy the “regular basis” part because they were two separate “plans,” that would likely not be the case when the “plan” is the retirement investor’s IRA.
As a result, if a plan-to-IRA rollover recommendation by an advisor with a pre-existing fiduciary relationship to the plan or an IRA-to-IRA transfer recommendation results in compensation that the advisor would not have otherwise received (e.g., the IRA management fee or a commission on recommended IRA investments), the advisor and the firm should satisfy the conditions in the current PTE 2020-02 in order to avoid having the IRA management fee be a prohibited transaction.
PTE 2020-02 Conditions that Apply Now
In its current form, PTE 2020-02 imposes four requirements as follows:
- Compliance with “Impartial Conduct Standards,” which requires: (a) adherence to a best interest standard (i.e., a standard that mirrors the ERISA duties of prudence and loyalty), (b) reasonable compensation, (c) best execution standards and (d) no materially misleading statements
- Pre-transaction disclosures consisting of: (a) acknowledgement of fiduciary status under ERISA and/or the Code, (b) description of services and material conflicts of interest and (c) in the case of a rollover, a statement of the specific reasons as to why the rollover or IRA transfer is in the investor’s best interest (the rollover disclosure)
- Adoption and implementation of policies and procedures to ensure compliance
- A retrospective review conducted by the firm at least annually reduced to a written report certified by a senior executive officer (no later than six months after the end of the period being reviewed).
We note that amended PTE 2020-02 — that was stayed by the Texas federal district courts — required the rollover disclosure only for rollovers from an ERISA plan, and not rollovers from other tax-qualified plans or IRA-to-IRA transfers. As a result, the rollover disclosure requirement applies to all rollovers for which PTE 2020-02 relief is needed (for context, the DOL considers the term “rollovers” to include plan-to-IRA rollovers, IRA-to-IRA transfers, IRA-to-plan rollovers and plan-to-plan transfers). Broker-dealers who revised their disclosure documents in anticipation of the amended PTE 2020-02 may need to modify their rollover disclosure forms and practices to address this.
Rollover Recommendations Not Subject to the Current DOL Fiduciary Rule
For rollover recommendations that are not considered a fiduciary act under the current DOL fiduciary definition (that is, the five-part test), advisors should follow a process that complies with the SEC’s best interest standard for rollovers found in Regulation Best Interest (and amplified by the which is similar to the best interest process required by the DOL in PTE 2020-02. We discussed the similarity between these two standards in detail in our blog post “ ”
Conclusion
Broker-dealers should identify rollover recommendations that would likely be considered fiduciary recommendations under the DOL’s current fiduciary rule and ensure there is a process in place to comply with the current conditions of PTE 2020-02. For those rollover recommendations that are not considered fiduciary recommendations under the DOL’s current fiduciary rule, broker-dealers should confirm that there are current practices in place for compliance with the SEC standards.
