New ERISA Prohibited Transaction Exemption (PTE) Effective February 16

What just happened?

The US Department of Labor (DOL) announced that Prohibited Transaction Exemption (PTE) 2020-02, which governs conduct by 3(21) ERISA fiduciaries (generally those who provide non-discretionary advice for a fee), took effect on February 16, 2021. (Under Section 4975 of the Internal Revenue Code, this also applies to persons who provide non-discretionary advice to IRAs.)

Among the key provisions of PTE 2020-02 is its guidance on IRA rollovers. Applying this guidance requires brokers and advisers to make the following analysis.

1. Who is an ERISA fiduciary?

Fiduciary status is determined by applying this five-part test:

• Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property
• On a regular basis
• Pursuant to a mutual agreement, arrangement or understanding
• That the advice will serve as a primary basis for investment decisions
• The advice is individualized to the needs of the plan (or retirement investor)

As the term “fee” broadly interpreted, virtually any benefit (advisory fees, commissions, trails, etc.) will typically be sufficient to meet the fee requirements.

While making a rollover recommendation would not seem to be advice that is provided “on a regular basis,” the DOL looks at this in the context of the ongoing relationship with the client. If the broker or adviser is providing, or is recommending the rollover with the intent to provide, ongoing advice, the “regular basis” element will be met.

Examples of services that would not be considered to be provided on a “regular basis” include transaction-only services, investment education, sporadic interactions, arms-length sales transactions, and bringing in an unconflicted financial expert to make a rollover recommendation.

While some financial firms have tried to mitigate the “mutual agreement, arrangement or understanding” element by specifically disclaiming this in the client agreement, it is the understanding of the National Regulatory Services (NRS®) company that if the facts and circumstances of the advice indicate there is a mutual agreement, etc. then the disclaimer may be insufficient to avoid fiduciary status.

In making this analysis, please bear in mind that the test requires that advice be a primary basis for investment decisions – not the primary basis.

2. What is required to recommend a rollover?

1. Meet the conditions of PTE 2020-02:
   1. Apply “Impartial Conduct Standards.” This means providing advice (a) that is subject to ERISA’s prudence standard and (b) that does not place the financial or other interests of the firm, its representative, or any affiliate or other party ahead of the interests of the retirement investor, or subordinate the retirement investor’s interests to their own.  Included in this are the duties to charge reasonable compensation, obtain (or provide) best execution (if applicable) and a prohibition on materially misleading statements.
   2. Acknowledge fiduciary status.
   3. Describe services and disclose material conflicts in advance.
   4. Document rollover advice.
   5. Develop written policies and procedures to comply with these standards and mitigate conflicts.
   6. Conduct annual retrospective compliance review.
2. Apply the old, vacated Best Interest Contract Exemption.  Those of you who devoted so much time to the BICE may be heartened to know that you can now implement those procedures through December 21, 2021, by which time you must comply with PTE 2020-02
3. Work with an ERISA professional to determine if other PTEs (typically focused on a specific type of transaction) may provide relief based on your specific facts and circumstances.

What does this mean?

The financial services industry has, by and large, been caught flat-footed. It was widely anticipated that the Biden administration would freeze, or at least slow-walk, PTE 2020-02. However, unless and until the new Secretary of Labor nominee Marty Walsh announces different plans once confirmed, these are the requirements that financial services firms must live with.

What should firms do now?

Financial services firms should analyze their rollover recommendations to determine if they are fiduciaries. If they are, they should proceed with all deliberate speed to meet the requirements of PTE 2020-02, the BICE, or other PTEs that may apply.
Firms may also need to update their policies and procedures and required disclosures.

Contact NRS today for more information.