The Department of Labor (DOL) has issued a temporary enforcement policy (Field Assistance Bulletin 2021-02) related to Prohibited Transaction Exemption (“PTE”) 2020-02, an exemption for investment advice fiduciaries with respect to employee benefit plans and individual retirement accounts. The exemption became effective on February 16 of this year, but the DOL has provided transitional relief through December 20, 2021.
Investment advice fiduciaries who rely on the exemption must render advice that is in their plan and IRA customers’ best interest in order to receive compensation that would otherwise be prohibited in the absence of an exemption, including commissions, 12b-1 fees, revenue sharing, and mark-ups and mark-downs in certain principal transactions. The exemption expressly covers prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA.
When the DOL finalized PTE 2020-02, it also announced that the temporary enforcement policy of Field Advice Bulletin(“FAB”) 2018-02 would also remain in effect until December 20, 2021. Under FAB 2018-02, the DOL stated that it would not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with the “Impartial Conduct Standards” for transactions that would have been permissible under the 2016 DOL regulations addressing the same general subject matter or treat such individuals as violating the applicable prohibited transaction rules.
The Impartial Conduct Standards specifically require financial institutions and investment professionals to:
-Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty;
--Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
--Under the loyalty standard, advice providers may not place their own interests ahead of the interests of the retirement investor, or subordinate the retirement investor’s interests to their own;
-Charge no more than reasonable compensation and comply with federal securities laws regarding “best execution”; and
-Make no misleading statements about investment transactions and other relevant matters.
In FAB 2021-02, the DOL explained that the December 20, 2021, expiration date of the temporary enforcement policy presented practical difficulties for financial institutions that are in the process of complying with the conditions of PTE 2020-02. In response, the DOL provided additional transition relief to a limited degree in two respects. First, for the period from December 21, 2021, through January 31, 2022, the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently and in good faith to comply with the Impartial Conduct Standards for transactions that are exempted in PTE 2020-02 or treat such fiduciaries as violating the applicable prohibited transaction rule. Second, for the period from December 31, 2021, through June 30, 2022, the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who are otherwise in compliance with PTE 2020-02 based solely on their failure to comply with the disclosure and documentation requirements for rollover recommendations. However, underscoring the limited nature of the relief provided, the DOL stated that all other requirements of the exemption will be subject to full enforcement as of February 1, 2022.