The DOL’s new fiduciary advice rule, effective September 23, 2024, will cause many one-time recommendations to be fiduciary advice. As a result, many more recommendations to retirement investors—private sector retirement plans, participants in those plans, and IRA owners—by broker-dealers and their representatives (advisors) will undoubtedly be fiduciary advice under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (the Code).
If the fiduciary advice results in compensation that the advisor would not have received absent the advice (for example, commissions or 12b-1 fees on IRA investment transactions or advisory fees from the IRA, in the case of a rollover), it is considered conflicted compensation prohibited under ERISA and the Code. As a result, many advisors will need the protection provided by Prohibited Transaction Exemption (PTE) 2020-02 in order to receive the conflicted compensation resulting from the fiduciary advice.
The DOL amended PTE 2020-02 at the same time as the new fiduciary rule; however, the effective date for some of the PTE’s conditions are delayed. This post describes the effective dates that apply to PTE 2020-02.
The Four Conditions of Amended PTE 2020-02:
Under amended PTE 2020-02, four conditions must be satisfied in order to obtain PTE relief:
- Impartial Conduct Standards – Compliance with a fiduciary standard of conduct comprised of a care and a loyalty obligation (a new name for the DOL’s best interest standard under current PTE 2020-02) that mirrors the ERISA duties of prudence and loyalty, reasonable compensation, best execution standards and no materially misleading statements;
- Pre-Transaction Disclosure – A disclosure to the retirement investor at or before the time the recommended transaction occurs consisting of—
- Acknowledgement of fiduciary status under ERISA and the Code;
- Description of care and loyalty obligations;
- All material facts concerning fees and costs, type and scope of services, including any material limitations;
- All material facts related to conflicts of interest; and
- Rollover Disclosure: For rollover recommendations from an ERISA plan or for recommending the post-rollover investment of assets from an ERISA plan, documentation of the bases for the recommendation.
In general, the Pre-Transaction Disclosure is more detailed than what is currently required under PTE 2020-02. However, unlike current PTE 2020-02, the Rollover Disclosure is only required for rollovers or post-investment recommendations from an ERISA plan. In other words, under amended PTE 2020-02, the Rollover Disclosure is not required for recommended IRA transfers or rollovers from a non-ERISA plan (like a solo 401(k) plan), although – as the DOL points out – advisors will still need to satisfy the care and loyalty obligations for such recommendations. (Also, the DOL said, in the preamble, that in its opinion, it would be hard to satisfy the supervision and retrospective review conditions of the PTE if those recommendations were not documented. But that refers to internal documentation, and not to disclosures.)
- Policies and Procedures – Adoption and implementation of policies and procedures to ensure compliance with the Impartial Conduct Standards and the other conditions of the PTE; and
- Retrospective Review – An annual retrospective review conducted no later than six months after the end of the review period to detect and prevent violations of the PTE conditions that is reduced to a written report certified by a senior executive officer.
What is Effective September 23, 2024?
Starting September 23, 2024, the new fiduciary advice definition will apply. Also, if an advisor needs the relief afforded by PTE 2020-02, the following two conditions of PTE 2020-02 are effective September 23, 2024:
- Adherence to the Impartial Conduct Standards; and
- The Pre-Transaction Disclosure acknowledging fiduciary status under ERISA and the Code.
From a practical standpoint, this means that effective September 23, 2024, if an advisor makes a recommendation that constitutes fiduciary advice, the advisor will need to ensure that the advice satisfies the Impartial Conduct Standards. Of those Standards, the most difficult to satisfy will probably be the Care Obligation. For example, before an advisor recommends a rollover, the advisor will need to compare the services, investments and expenses in the plan and the proposed rollover account, in light of the participant’s investment profile, to determine if the recommendation is in the best interest of the participant. A similar process would be required for any conflicted recommendation, e.g., a recommendation to transfer an IRA or a recommendation of a mutual fund with a front-end load or a 12b-1 fee.
What is Effective September 23, 2025?
The other conditions of PTE 2020-02 are effective September 23, 2025, consisting of:
- All components of the Pre-Transaction Disclosure (in addition to the fiduciary acknowledgment that is effective September 23, 2024);
- Written and enforced Policies and Procedures; and
- Annual Retrospective Review.
It is logical to conclude that the initial period for the Annual Retrospective Review under amended PTE 2020-02 will be the short period of September 23 to December 31, 2025, although the DOL did not expressly say that. If that is the case, then the Annual Retrospective Review for that initial review period will need to be conducted within the first six months of 2026.
Concluding Thoughts
During these four months before the new fiduciary rule becomes effective, broker-dealers should examine interactions with investors to identify those that will be considered fiduciary advice and to develop processes that are in compliance with the Impartial Conduct Standards. Although the Policies and Procedures do not need to be finalized until September 23, 2025, broker-dealers will need to devise a compliant and consistent approach for compliance with these standards starting September 23, 2024, in order to satisfy PTE.
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.
