The Department of Labor (DOL) has issued Field Assistance Bulletin No. 2021-02 to further delay enforcement of Prohibited Transaction Exemption 2020-02 (PTE 2020-02), which sets forth several requirements that financial institutions and investment professionals must satisfy when providing fiduciary investment advice, including advice to roll over a retirement plan account into an individual retirement account (IRA). The transition relief currently in effect was set to expire on December 20, 2021. Citing practical difficulties caused by the year-end timing, the DOL has extended its non-enforcement policy for compliance with PTE 2020-02 to January 31, 2022, for all requirements other than the specific documentation and disclosure requirements for rollover recommendations. For the documentation and disclosures for rollovers, the non-enforcement policy has been extended to June 30, 2022. Therefore, financial institutions and investment professionals now have additional time to ensure they have processes and procedures in place to fully comply with PTE 2020-02.

Background

The DOL adopted PTE 2020-02 on December 18, 2020, to provide an exemption from prohibited transaction rules under the Employee Retirement Income Security Act and the Internal Revenue Code for investment advice fiduciaries with respect to employee benefit plans and IRAs. Investment advice fiduciaries who rely on the exemption must generally render advice that is in the best interest of the retirement investor in order to receive compensation that would otherwise be prohibited in the absence of an exemption, including commissions, 12b-1 fees, revenue sharing, and mark-ups and mark-downs in certain principal transactions. The exemption applies to prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA. PTE 2020-02 became effective on February 16, 2021, but the DOL provided transitional relief through December 20, 2021.

Requirements

PTE 2020-02 requires financial institutions and investment professionals to do the following:

• Provide advice according to impartial conduct standards;

• Provide certain disclosures before engaging in a transaction;

• Establish and maintain written policies and procedures to comply with the impartial conduct standards; and,

• Through a senior executive officer, engage in an annual retrospective review of compliance with PTE 2020-02.

As a result, financial institutions and investment professionals will need to create or update policies, procedures, checklists, forms, and services agreement to meet the requirements to PTE 2020-02.

Practice Pointer: Avoid including the “kitchen sink” in policies, checklists, and other documents designed to satisfy the requirements of PTE 2020-02. Compliance documents should provide functional roadmaps that are workable in practice and do not self-impose items that are not required for compliance.

Financial institutions and investment professionals should take particular care to avoid an easy misstep of failing to provide the following required disclosures:

• Acknowledgment of fiduciary status, which may be satisfied using model language provided by the DOL;

• Description of services that will be provided and any material conflicts of interest; and,

• If a rollover recommendation is being provided, documentation of the specific reasons as to why the rollover is in the best interest of the retirement investor.