Investment Advice Fiduciary, PTE 2020-02 and Deadlines

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from California is representative of a common inquiry related to the Department of Labor’s (DOL’s) definition of investment advice fiduciary.The advisor asked: “I read that the DOL is delaying the release of its regulations regarding the definition of investment advice fiduciary. Does that mean the enforcement of prohibited transaction exemption (PTE) 2020-02 is also delayed?”

Highlights of Discussion

While it is true the DOL is delaying until the end of 2022 the release of its notice of proposed rulemaking (NPRM) with respect to the definition of the term “fiduciary” for persons who render investment advice to plans and IRAs for a fee, the enforcement deadlines for PTE 2020-02 remain the same for those following the PTE. The final enforcement deadline for the last elements of PTE 2020-02 is July 1, 2022.

For a little background, a final DOL regulation, effective July 7, 2020, officially reinstated the original 1975 Five-Part Test for determining investment advice fiduciary status. An investment advice fiduciary must follow a PTE in order to receive pay for advice given.

PTE 2020-02 provided further interpretive guidance on the Five-Part Test and included a process for avoiding a prohibited transaction involving the provision of investment advice for a fee. Other PTEs also address the receipt of fees for advice.

PTE 2020-02 originally took effect February 16, 2021. Later, the DOL implemented a “nonenforcement policy” under Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021, for those who diligently and in good faith complied with the“Impartial Conduct Standards.” FAB 2021-02further extended the nonenforcement policy through January 31, 2022. The three Impartial Conduct Standards mandate that advice be given 

• In the best interest of the retirement investor,  

• At a reasonable price,  

• Without any misleading statements. 

After January 31, 2022, investment advice fiduciaries following PTE 2020-02 are required to continue to follow the Impartial Conduct Standards and

• Acknowledge in writing their fiduciary status under ERISA and the Internal Revenue Code; 

• Describe in writing the services to be provided and any material conflicts of interest that may exist; 

• Adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest; and 

• Conduct an annual retrospective review of their compliance with the requirements and produce a written report that is certified by one of the financial institution’s senior executive officers. 

The DOL delayed enforcement of PTE-2020-02’s specific requirements for rollover advice until July 1, 2022. On and after that date, if the advice involves a rollover recommendation, then advisors must

• Document the reasons that a rollover recommendation is in the best interest of the retirement investor; and

• Disclose the justification for the rollover in writing to the retirement investor. 

Conclusion

PTE 2020-02 and the (anticipated) proposed rules regarding the definition of investment advice fiduciary are separate DOL pronouncements. The DOL is delaying the release of its proposed rules with respect to the definition of investment advice fiduciary until the end of 2022. However, that delay does not affect the enforcement deadlines for PTE 2020-02.