PTE 2002-02

SEC Settles Enforcement Case on Rollover Recommendations

November 19, 2024 | Patricia Klusmeyer

The SEC recently entered a cease-and-desist order against an SEC-registered investment adviser Federal Prep Advisors, Inc. (“Federal Prep”) and its principal regarding its rollover recommendations from Thrift Savings Plan (“TSP”) accounts to advisory Individual Retirement Accounts (“IRAs”). The SEC determined that Federal Prep did not adequately evaluate and disclose the costs associated with the TSP and its services or the available investment options under the TSP, among other things.[1]

The Thrift Savings Plan is a defined contribution retirement plan for federal employees and members of the uniformed services, and generally has lower fees compared to private employer-sponsored 401(k) plans. From at least June 2020 until around June of 2023, Federal Prep advised approximately 300 clients to rollover assets from a TSP account to an IRA managed by Federal Prep.

DOL Proposes Amendments to PTE 2020-02

January 16, 2024 | Patricia Klusmeyer

In connection with its recently proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), the U.S. Department of Labor (DOL) also released a proposed amendment to PTE 2020-02: Improving Investment Advice for Workers & Retirees.

Under PTE 2020-02 Financial Institutions and Investment Professionals, which includes investment advisers and their representatives, can receive compensation for recommending certain transactions to Retirement Investors (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) which would otherwise violate the prohibited transaction rules under ERISA and the Code.

Requirements include complying with certain Impartial Conduct Standards (i.e., providing advice that is in the best interest of the Retirement Investor, receiving only reasonable compensation, and avoiding materially misleading statements), providing certain disclosures, adopting policies and procedures, conducting an annual retrospective review, and maintaining records of compliance for six years. Continue reading ›

DOL Proposes Amendments to Definition of Investment Advice Fiduciary

January 11, 2024 | Patricia Klusmeyer

This past October the U.S. Department of Labor (DOL) released a proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). Investment advice fiduciaries must generally avoid engaging in certain prohibited transactions absent an exemption. In connection with this proposed amendment, the DOL also released proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24.

Whether an individual is providing fiduciary investment advice under ERISA and the Code is currently determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, a person will be deemed to be rendering fiduciary investment advice if: 1) the person renders advice to a plan or IRA (including plan participants or beneficiaries) as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the particular needs of the plan or IRA.[1] Section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code further provide that this investment advice must be “for a fee or other compensation, direct or indirect.” Continue reading ›

DOL Drops Appeal of Court Ruling Partially Vacating its PTE 2020-02 Guidance

June 22, 2023 | Patricia Klusmeyer

The DOL recently dismissed its appeal of an earlier ruling from the U.S. District Court for the Middle District of Florida (the Court) invalidating part of the DOL’s guidance regarding application of its fiduciary duty to rollover recommendations. The guidance was in the form of an FAQ issued in connection with PTE 2020-02 that explained how a recommendation to roll over retirement assets from a plan to an IRA at the beginning of an ongoing relationship could still be subject to ERISA and/or Code fiduciary duties.

Whether an individual is providing fiduciary investment advice under ERISA or the Code is determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, an individual will be deemed to be rendering fiduciary investment advice if: 1) the individual renders advice to a plan or IRA as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the needs of the plan or IRA.[1]
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DOL PTE 2020-02 Annual Retrospective Review Deadline Approaching

May 25, 2023 | Patricia Klusmeyer

PTE 2020-02 is a prohibited transaction exemption under ERISA. It requires Financial Institutions, including RIAs, to meet several enumerated requirements, including adhering to the “Impartial Conduct Standards,” in order to rely upon the exemption with respect to certain transactions, including rollover recommendations. It also requires Financial Institutions to adopt policies and procedures to assure compliance with all of the substantive provisions of PTE 2020-02.

RIAs relying on PTE 2020-02 are required to conduct an annual retrospective review of their policies and procedures for compliance with PTE 2020-02. The retrospective review must be documented in a written report that is certified by a senior executive officer of the firm. The review must be reasonably designed to assist the RIA in detecting and preventing violations of the Impartial Conduct Standards and its policies and procedures governing compliance with PTE 2020-02.
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Rollover Disclosure & Documentation Requirements to be Enforced Beginning July 1, 2022

May 18, 2022 | Patricia Klusmeyer

While the majority of the Department of Labor’s new fiduciary rule, Prohibited Transaction Exemption 2020-02 (“PTE 2020-02), became enforceable on January 31st, some of the requirements pertaining to rollover recommendations are set to be enforced on July 1, 2022.

As detailed in this blog post, the DOL provided transition relief in its Field Assistance Bulletin, FAB 2021-02 by extending the enforcement date of PTE 2020-02 through January 31, 2022 for investment advice fiduciaries who are working diligently and in good faith to comply with the “Impartial Conduct Standards” for any transactions that are exempted under PTE 2020-02. These standards include a best interest standard, a reasonable compensation standard, and a requirement to avoid any materially misleading statements about the recommended transaction and other relevant matters.

PTE 2020-02 also requires investment advice fiduciaries to document the specific reasons any rollover recommendations from an employee benefit plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another is in the best interest of the retirement investor. PTE 2020-02 further requires this documentation to be provided to the retirement investor prior to engaging in the rollover. In FAB 2021-02, the DOL announced that it would not enforce the documentation and disclosure requirements for rollover recommendations under PTE 2020-02 through June 30, 2022.
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Future of New DOL Fiduciary Rule Uncertain

January 29, 2021 | Steve Parker

Last month, the U.S. Department of Labor announced that it has finalized the new “fiduciary rule” proposed during the Trump administration, creating a new exemption to the fiduciary standards that investment advisers must comply with when servicing ERISA accounts and IRAs Specifically, the new rule – Prohibited Transaction Exemption 2002-02 – creates an exception to ERISA’s prohibited transaction rules and similar rules under the Internal Revenue Code. The DOL issued a Fact Sheet summarizing the rule and its impact.

The new exemption grants investment advisers more latitude and in dealing with such accounts. The exemption applies to both SEC and state-registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that serve as investment advice fiduciaries. The exemption is slated to become effective February 16, 2021. Some have speculated, however, that the new Biden administration may withdraw the rule and pursue a more restrictive one similar to the 2016 exemption adopted during the Obama administration.

After the US Court of Appeals for the Fifth Circuit struck down the Obama-era fiduciary rule in 2018, the DOL issued a Field Assistance Bulletin (FAB 2018-02), that was a temporary policy that provided relief under the prohibited transaction rules to investment advice fiduciaries, provided they worked in good faith the follow the “impartial conduct standards” that had been codified in the vacated rule. The impartial conduct standards require that an adviser act in the client’s best interest, receive only reasonable compensation and refrain from misleading clients. The new final rules, designed to supersede FAB 2018-02, were proposed in June 2020. FAB 2018-02 will remain in effect for 365 days following the publication of the new rule in the Federal Register, while the exemption will become effective 60 days after publication. Continue reading ›