Almost a year ago the Department of Labor (DOL) adopted Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”).  PTE 2020-20 allows investment advisors and broker-dealers to receive commissions, 12b-1 fees, revenue sharing, and other types of renumeration that would otherwise be prohibited.  However, because the DOL changed its interpretation of the “five-part fiduciary test,” rollover recommendations can now generally be classified as ERISA advice is the advice is ongoing.

This means that advice concerning rollovers of 401k assets into an IRA will be engaging in a prohibited transaction under ERISA. This also includes IRA transfers.

For investment advisors to rely on the PTE 2020-02, they must have policies and procedures to implement Impartial Conduct Standards, which require fiduciaries to ERISA and IRA plans to:

• Provide prudent investment advice

• Charge only reasonable compensation, and

• Avoid misleading statements.

As a fiduciary, you are required to do this anyway.

Financial firms are required to comply with the Impartial Conduct Standards by February 1, 2022. The documentation and disclosure requirements for rollovers, such as the written policies and procedures, annual review, and written disclosure, will not be enforced for rollovers until June 30, 2022.

The key conditions of the exemption require financial institutions and investment professionals to:

• Acknowledge that they are fiduciaries under ERISA;

• Disclose, in writing, to the client the scope of the relationship and all material conflicts of interest (similar to Regulation Best Interest’s requirement for broker-dealers);

• Comply with the Impartial Conduct Standards

• Exercise reasonable diligence, care, skill, and prudence in making a recommendation, meaning that the firm and its representatives have a reasonable basis to believe that the recommendation being made is in the best interest of the client, based on that client’s investment profile and the potential risks and rewards associated with the recommendation;

• Receive only reasonable compensation (as compared to the marketplace) and seek best execution of the transaction;

• Ensure that statements made to retirement investors about the recommended transaction are not materially misleading;

• Provide written disclosures to retirement investors of the reasons the rollover recommendation is in their best interest;

• Conduct an annual compliance review of the firm’s compliance with the conditions of PTE 2020-02 and document the results in a written report to a “Senior Executive Officer” of the financial institution; and

• Maintain written documentation of the specific reasons that any recommendation to rollover assets from an ERISA plan to an IRA, from one IRA to another IRA, or from one type of account to another (such as a commission-based account to a fee-based account) is in the best interest of the retirement investor.

This is far from everything that can be said about the matter, but this is a website article meant to, as we all know, generate interest and search engine hits.