Best Interests Standard of Due Diligence for Advisors # 59 | Faegre Drinker Biddle & Reath LLP


The “fiduciary rule” of the Ministry of Labor, PTE 2020-02: the FAQ

This series focuses on the new DOL fiduciary “rule”, which came into effect on February 16. This article, and the following ones, examine the Frequently Asked Questions (FAQ) issued by the DOL to explain the fiduciary definition and conflict of interest exemption.

Key points to remember

  • Prohibited Transactions Exemption 2020-02 – has two parts. Part of this is the expanded interpretation of the definition of a board of trustees (in the preamble to the PTE) which will cause many more recommendations for renewal to be considered trustees.
  • This article takes a look at DOL FAQ # 9 which explains that the Prohibited Transaction Exemption (PTE) 2020-02 provides relief from a rollover IRA’s indemnification ban due to a renewal fiduciary recommendation. .
  • The second part is an exemption that creates an exception to the rules on prohibited transactions for boards of trustees that result in compensation for a financial institution (for example, broker or investment advisor) and its investment professionals. The exemption includes compensation relief from a Rolling IRA and its investments (including annuities). FAQ # 9 explains this relief.


DOL’s Prohibited Transaction Exemption (PTE) 2020-02 (Improving investment advice for workers and retirees) allows investment advisers, brokers, banks and insurance companies (“financial institutions”) and their representatives (“investment professionals”) to receive conflicting compensation resulting from non-trust investment advice. discretionary pension plans, members and IRA owners (“retirement investors”). In addition, the DOL announced, in the preamble to the PTE, an expanded definition of the board of trustees, which means that many more financial institutions and investment professionals will be trustees of their recommendations to retirement investors and, by therefore, will need the protection provided by the exemption.

In April, the DOL published Faq which explain the fiduciary interpretation and the conditions of the exemption.

Reduction of prohibited transactions for rollover recommendations

This article discusses FAQ # 9, which deals with the relief provided by PTE 2020-02 for compensation resulting from renewal recommendations.

Q9. Does PTE 2020-02 provide prohibited transaction relief for rollover recommendations?

Yes, the exemption provides relief for rollover recommendations that result in prohibited transactions, as long as the conditions for the exemption are met. In addition to the other conditions, financial institutions must document and disclose in writing the specific reasons why a rollover recommendation is in the best interest of the retirement investor. In doing so, financial institutions should consider the retirement investor’s alternatives to a rollover, such as leaving the money in an employer’s plan and taking advantage of the investment options available in that plan, including options available other than those reflected in the investor’s current plan of retirement holdings. Financial institutions and investment professionals should make diligent and prudent efforts to obtain information about the existing benefit plan and the interests of participants therein. See Q15 for more information on factors to consider when making shift recommendations.

Let’s break this down into steps.

  1. If a renewal recommendation is given in a way that satisfies the 5-part fiduciary test (and, due to the new interpretation of the DOL, most renewal recommendations will be), the “financial institution” and ” investment professionals ”will provide fiduciary advice. The advice will be non-discretionary, as the participant must agree with the recommendation before it can be implemented.
  2. If the recommendation is a board of trustees, it will result in a prohibited transaction, since the financial institution (and / or possibly an affiliate, for example, an investment manager) and the investment professional will earn money from the IRA as a result of the fiduciary recommendation. If it is a prohibited transaction, the “compensation” must be returned to the IRA (instead of being kept by the financial institution and the investment professional)… unless the conditions d ‘an available PTE are not satisfied. In ERISA language, these terms are called “conditions”.
  3. Fortunately, PTE 2020-02 provides for this relief (i.e. it applies to non-discretionary fiduciary recommendations to move to an IRA, if the conditions for the exemption are met).
  4. As the FAQ states, the financial institution must document and disclose in writing the specific reasons that a rollover recommendation is in the best interest of the retirement investor (i.e. the member). I put in bold “specific reasons” because I have seen some efforts to comply that use a generic list of reasons that could apply to any retirement investor, instead of describing why the recommendation is in the best interest of the investor. participant in particular.
  5. To be able to determine why a rollover might be in the best interest of a participant, the financial institution and the investment professional must engage in a “prudent” process (to satisfy ERISA) and a ” in the best interest ”(to comply with the TEP). Fortunately, the requirements for both are the same. . . collect the relevant information about the plan, the IRA and then the participant, then evaluate that information to determine which option is in the best interest of the participant. (These four steps can be labeled (i) plan information, (ii) IRA information, (iii) participant information, and (iv) best interest process.)
  6. These four steps work until December 20 (due to a DOL and IRS non-enforcement policy in effect until then, which does not require you to follow Step 5). However, as of December 21, a fifth step is required, which is a written disclosure of why the referral is in the best interest of the participant.
  7. Unfortunately, some mistakenly believe that the fiduciary / best interest requirement for rollover recommendations is also postponed to December 21. This is not the case.
  8. The FAQ also notes that a financial institution and an investment professional must have and consider information about all investments in the plan, even those not used by the participant. This adds an additional element of difficulty in obtaining and evaluating information.

As the FAQ notes, Question and Answer # 15 provides more detail on what information to collect and assess as part of the fiduciary / best interests process. In a few weeks we will get to this FAQ.

Concluding thoughts

PTE 2020-02 offers relief from prohibited transactions resulting from recommendations for participants to roll over their accounts in IRAs. However, it does not exempt from the fiduciary / best interests standard of care. In this case, financial institutions and investment professionals should engage in a prudent process to collect and assess relevant information. This fiduciary requirement already applies and is only delayed until December 21.

On the other hand, many PTE 2020-02 requirements are, in effect, delayed until December 21, due to the DOL and IRS non-enforcement policy. But, even then, financial institutions and investment professionals must currently meet standards of impartial conduct, which are: a standard of care in the best interest, no more than reasonable compensation, and no materially misleading statements.

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