Proposed Changes to PTE 2020-02 that Impact Broker-Dealers

The DOL has proposed amendments to its regulation defining fiduciary advice so that, in most cases, a single recommendation to a retirement investor will be a fiduciary act.  In addition, the DOL has proposed amendments to  Prohibited Transaction Exemption (PTE) 2020-02, which provides relief for prohibited conflicts of interest (e.g., commissions and fees). Both the amended regulation and the PTE could be finalized soon.  This post focuses on the proposed amendments that will impact broker-dealers and their registered representatives (investment professionals).


The current and proposed PTE 2020-02 allow broker-dealers and investment professionals to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to private sector tax-qualified and ERISA-governed retirement plans, participants in those plans, and IRA owners (collectively, “retirement investors.”).  The current version of the PTE is not available for investment advice generated solely by an interactive website based on personal information supplied by the investor on the website (i.e., robo-advice) where there is no personal interaction or advice with an investment professional.

The PTE imposes the following four fundamental requirements:

  • Compliance with a fiduciary standard of conduct, referred to as the Impartial Conduct Standards, requiring adherence to a best interest standard that mirrors the ERISA duties of prudence and loyalty, reasonable compensation, best execution standards and no materially misleading statements;
  • Providing a pre-transaction disclosure to the retirement investor;
  • Adoption and implementation of policies and procedures to ensure compliance; and
  • An annual retrospective review that must be reduced to a written report certified by a senior executive officer.

If these conditions are not satisfied, the compensation that the broker-dealer earns from a conflicted recommendation – for example, commissions or 12b-1 fees on IRA investment transactions, in the case of a recommended rollover – is a prohibited transaction.

Proposed Amendments to PTE 2020-02

The DOL has proposed amendments to these conditions in five primary respects (the Proposal).

  1. Eligibility

    The Proposal narrows eligibility for PTE relief by authorizing the DOL to revoke eligibility for any firm, its affiliates (including overseas affiliates), or investment professionals who engage in systematic failures to comply with the PTE or certain enumerated violations of law.  Losing eligibility for PTE relief would be highly detrimental to a firm because it would prevent the firm and its investment professionals from making any covered recommendations – such as rollovers or IRA transfers – during the period of ineligibility.

  2. Robo-Advice Would be Covered

    Under the Proposal, the PTE relief would be available for robo-advice.  This means that firms that rely on computer models and receive conflicted compensation would have to satisfy a best-interest standard and meet the other conditions described above.

  3. New Pre-Transaction Disclosure Requirements

    The DOL is proposing that the pre-transaction disclosure include a written statement of the best-interest standard owed to the retirement investor.  This requirement would presumably have a two-fold effect – namely, to educate the investor about the high standard that applies to the recommendation and to encourage firms and their investment professionals to satisfy this duty.

    The PTE currently requires that the disclosure describe the services to be provided and the material conflicts of interest.  The DOL is proposing that the disclosure also include a statement on whether the retirement investor will pay for such services directly or indirectly, including through third-party payments (e.g., 12b-1 fees, front-end loads).

    In addition, the Proposal adds a requirement that the disclosure include a statement that the retirement investor has the right to obtain – free of charge – specific information regarding costs, fees and compensation in order to permit the investor to make an informed decision about costs and the significance and severity of the conflicts of interest.  If this requirement is finalized, firms will need to prepare a document containing this specific information so that it is available to investors who request it.

    If the covered recommendation is a rollover, the PTE currently requires that the disclosure identify the specific reasons why the rollover is in the best interest of the retirement investor.  The Proposal is worded differently and states that the investment professional must document the basis for its conclusion as to whether the rollover is in the best interest and provide that documentation to the retirement investor.  The Proposal also lists the relevant factors to consider in developing the recommendation (e.g., alternatives to a rollover and fees, services and investments of each alternative).  These relevant factors are reflected in the DOL’s form language for the disclosure as well.  Taken together, these proposed changes suggest that the proposed disclosures could be more expansive and require information in addition to what is currently required.

  4. Policies and Procedures

    The PTE currently requires that the firm’s policies and procedures must mitigate conflicts of interest so as not to create an incentive for the firm or investment professional to place their interests ahead of the retirement investor.  The Proposal would add a requirement that the firm not use quotas, appraisals, bonuses, contests, special awards or similar incentives that a reasonable person would conclude are likely to result in recommendations that are not in the investor’s best interest.  If this Proposal is adopted, firms will need to evaluate such incentives to determine if the conflict can be mitigated and, if so, the mitigation technique to apply.

  5. Failure to Adequately Self-Correct

    If there is a failure to meet the PTE conditions, then a prohibited transaction occurs.  Fortunately, the PTE sets forth a self-correction process to prevent that result.  If, however, the corrections are not timely and compliant, the failure will be a non-exempt prohibited transaction.  This means the prohibited transaction must be unwound and the firm must file a Form 5330 with the IRS and pay an excise tax.  Under the Proposal, when that occurs, the senior officer will need to include a statement about this in the certification of the retrospective review stating that the firm has filed a Form 5330 with the IRS and paid the excise taxes that are due.  In other words, under the Proposal, the non-exempt prohibited transaction will need to be specifically highlighted in the certification.


If finalized in its current form, the Proposal could have a significant impact on firms and their investment professionals.  To prepare, firms should review their disclosures to determine to what extent additional disclosures will need to be developed and evaluate incentives and contests to determine whether mitigation techniques are available.  Also, firms should ensure that PTE failures are timely discovered and self-corrected under the PTE self-correction process.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

About the Author: Joan M. Neri

Joan Neri represents plan service providers – including broker-dealers and registered investment advisers – and employer plan sponsors and counsels them on fulfilling their obligations under ERISA and complying with the Internal Revenue Code rules governing retirement plans and accounts. Joan advises on ERISA fiduciary status and responsibilities, avoidance of prohibited transactions, the considerations associated with structuring, developing and offering investment products and services to ERISA plans and day-to-day plan operational compliance issues.

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