The U.S. Department of Labor (DOL) amended Prohibited Transaction Exemption 2020‑02 (Amended PTE 2020-02) on April 25, 2024. This amendment addresses administrative deficiencies cited in federal court decisions challenging the original version of PTE 2020-02. Concurrent with the issuance of Amended PTE 2020-02, the DOL released regulations redefining when a person gives investment advice as a “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code). The DOL’s rules apply with respect to retirement plans under ERISA and tax-qualified accounts under the Code, such as individual retirement accounts (IRAs), Archer MSAs, health savings accounts (HSAs) and Coverdell education savings accounts.
This is the second of three Warner eAlerts covering the final fiduciary rule. In our first eAlert, we summarized the final regulation defining fiduciary investment advice. In this eAlert, we cover Amended PTE 2020‑02. In our third and final eAlert on this topic, we will discuss the other PTEs amended as part of the final fiduciary rulemaking (PTEs 84-24, 75-1, 77-4, 80-83 and 86-128).
Background
ERISA and the Code include broad statutory prohibited transactions that categorically forbid plan fiduciaries from engaging in transactions involving conflicts of interest deemed likely to injure the retirement plan, plan participants and/or tax-qualified account holders. ERISA gives the DOL broad administrative authority to issue prohibited transaction exemptions tailored to specific circumstances. The DOL also has broad statutory authority to interpret the “fiduciary” definition and related prohibited transaction provisions of ERISA and the Code, subject to generally applicable administrative rulemaking standards and procedures.
Description of Amendment to PTE 2020-02
Amended PTE 2020-02 has been broadened to cover more transactions, and it revised some of the exemption’s conditions to emphasize the core standards underlying this administrative exemption. These changes impact financial institutions such as banks, broker-dealers, investment advisers, insurance companies and agencies, and the professionals who work for them. Amended PTE 2020-02’s requirements, which are applicable to retirement plans and tax-qualified accounts, overlay similar banking, securities and insurance regulations, but compliance with industry regulations may not fully satisfy Amended PTE 2020-02’s requirements — both apply.
Under these core standards, financial institutions and their investment professionals making investment recommendations to plans, participants and tax‑qualified account holders must:
- Acknowledge their fiduciary status in writing to the retirement investor.
- Disclose their services and material conflicts of interest to the retirement investor.
- Adhere to the DOL’s Impartial Conduct Standards requiring them to:
- Investigate and evaluate investments, provide advice and exercise sound judgment in the same way that knowledgeable and impartial professionals would in similar circumstances (Care Obligation).
- Never place their own interests ahead of the retirement investor’s interests or subordinate the retirement investor's interests to their own (Loyalty Obligation).
- Charge no more than reasonable compensation and, if applicable, comply with federal securities laws on “best execution” in purchasing or selling securities products.
- Avoid making misleading statements about investment transactions and other relevant matters.
- Adopt firm-level policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and mitigate conflicts of interest that could otherwise cause violations of those standards.
- Document and disclose the specific reasons for rollover recommendations.
- Conduct an annual retrospective compliance review.
Amended PTE 2020-02 may be relied on by financial institutions and investment professionals without regard to their business model, fee structure or type of product recommended, including insurance and annuity products, subject to their compliance with the core standards.
Applicability Date
Amended PTE 2020-02 applies to transactions made pursuant to investment advice provided on or after September 23, 2024 (Applicability Date). For investment advice and related transactions completed before the Applicability Date, the prior version of PTE 2020-02 will continue to apply. However, to the extent that a party receives ongoing compensation for a recommendation that was made before the Applicability Date, including through a systematic purchase payment or trailing commission, Amended PTE 2020-02 will not apply unless and until new investment advice is provided.
To provide sufficient time to fully comply with the revised conditions, Amended PTE 2020‑02 includes a one-year implementation period beginning September 23, 2024. During this one-year period, financial institutions and their professionals may receive reasonable compensation if they comply with the Impartial Conduct Standards and the fiduciary acknowledgment requirements.
Expanded Scope of Amended PTE 2020-02
Universal Standard of Care. The DOL intends Amended PTE 2020-02 to create a single standard of care that applies universally to all fiduciary investment advice, regardless of the specific type of product or advice provider.
Principal Transactions. Amended PTE 2020-02 provides exemptive relief for all transactions, regardless of whether they are executed on a principal or agency basis.
Financial Institutions and Investment Professionals. Amended PTE 2020-02 is broadly available for financial institutions and investment professionals, and their affiliates and related entities, including (but not limited to) independent marketing organizations (IMOs), field marketing organizations (FMOs), brokerage general agencies (BGAs) and others providing administrative support.
Amended PTE 2020-02 also expands the definition of financial institution to include non‑bank trustees or custodians that are approved to serve in these capacities under Treasury Regulations, but only to the extent they are serving as non‑bank trustees or custodians for HSAs.
Retirement Investors. The DOL’s rulemaking broadly defines a “retirement investor” to mean a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, plan fiduciary and IRA fiduciary. (Note: In Amended PTE 2020-02, the term “IRA” includes Archer MSAs, HSAs and Coverdell education savings accounts.)
Exclusions. Amended PTE 2020-02 provides that where the investment professional, financial institution or any affiliate is a named fiduciary or plan administrator of an ERISA‑covered plan, the investment professional, financial institution or affiliate cannot charge fees for advice given to that plan or its participants, unless they are selected to do so by an independent fiduciary. The DOL’s position is that employers generally should not use their employees' retirement benefits as a potential source of revenue or profit, without additional safeguards.
Pooled Employer Plans (PEPs) and Pooled Plan Providers (PPP). PPPs can rely on Amended PTE 2020-02 when the PPP is selected to provide investment advice to a PEP by an independent fiduciary.
Robo-advice. Amended PTE 2020-02 now covers investment advice generated solely by an interactive website in which computer software‑based models or applications provide investment advice based on investor-supplied personal interaction without any personal interaction or advice from an investment professional. Unlike the prior version of PTE‑2020-02, financial institutions relying on computer models must satisfy the exemption’s Impartial Conduct Standards and other protective provisions to rely on this exemptive relief.
No Investment Discretion. Importantly, exemptive relief under Amended PTE 2020-02 is only available when providing nondiscretionary investment advice where the retirement investor must make the investment decision. When acting as a discretionary investment manager responsible for investment decisions, financial institutions and investment professionals cannot rely on Amended PTE 2020-02.
Impartial Conduct Standards
Care Obligation and Loyalty Obligation. The DOL's original term, “Best Interest,” is replaced in Amended PTE 2020-02 with reference to its two separate components: The Care Obligation and the Loyalty Obligation. Although Amended PTE 2020-02 refers to each obligation separately, they are unchanged in substance from the original and proposed versions of PTE 2020-02.
In making a recommendation as to account type, it is important for the investment professional to ensure that the recommendation carefully considers the reasonably expected total costs to the retirement investor.
Amended PTE 2020-02 now also applies to insurance agents that are employees of an insurance company as well as insurance agents that are independent and work with multiple insurance companies. The DOL simultaneously published an amendment to PTE 84‑24, which provides a pathway to compliance for insurance companies that market their products through independent insurance agents, without requiring the companies to acknowledge fiduciary status. (We will cover PTE 84‑24 in our next eAlert.) To the extent that an insurance company that markets its products through independent agents chooses to rely on Amended PTE 2020-02, the independent agent and the insurance company must satisfy the exemption’s conditions, including the fiduciary acknowledgment and the Impartial Conduct Standards with respect to the recommendation.
Insurance companies can also comply with the exemption by creating oversight and compliance systems through contracts with insurance intermediaries such as IMOs, FMOs or BGAs. As one possible approach, an insurance intermediary could eliminate compensation incentives across all the insurance companies that work with the insurance intermediary, assisting the insurance companies with their independent obligations under the exemption.
Reasonable Compensation. The reasonable compensation standard requires that compensation received by financial institutions and financial professionals not be excessive, as measured by the market value of the particular services, and rights and benefits the investment professional and financial institution are delivering to the retirement investor. The reasonable compensation standard applies to covered transactions under the exemption, including those involving investment products that bundle services and investment guarantees or other benefits, such as annuity products.
No Materially Misleading Statements. Amended PTE 2020-02 clarifies that the prohibition against misleading statements applies to both written and oral statements.
Disclosure
While financial institutions can coordinate transmittal of required disclosures with others and rely on vendors and others to ensure transmittal, ultimately the responsibility to make required disclosures rests with the financial institution and its investment professionals. The DOL has not included a website disclosure requirement as an exemption condition.
Fiduciary Acknowledgment. At or before the time a covered transaction occurs, the financial institution must provide a written:
- Acknowledgment that the financial institution and its investment professionals are providing fiduciary investment advice to the retirement investor and are fiduciaries under ERISA, the Code or both.
- Statement of the Care Obligation and Loyalty Obligation owed by the investment professional and financial institution to the retirement investor.
The financial institution or investment professional is deemed to engage in a covered transaction on the later of:
- The date the recommendation is made; or
- The date the financial institution or investment professional becomes entitled to compensation (whether now or in the future) by reason of making the recommendation.
The DOL notes that Amended PTE 2020-02 does not create any new causes of actions, mandate enforceable contract commitments or expand on the remedial provisions of ERISA or the Code. The exemption specifically allows a financial institution or investment professional to expressly disclaim any private enforcement rights other than those statutory claims provided under ERISA, the Code or other laws.
Model Disclosure. To assist financial institutions and investment professionals, the preamble to Amended PTE 2020-02 includes model language that will satisfy the fiduciary acknowledgment and written statement of the Care Obligation and Loyalty Obligation requirements.
Nothing in the exemption prohibits the advice provider from limiting its fiduciary acknowledgement to specific recommendations or classes of recommendations if it is not acting as a fiduciary in other contexts. The exemption, however, will only cover recommendations that were subject to such acknowledgement.
Relationship and Conflict of Interest Disclosure. The final pre-transaction disclosure is based on the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest disclosure requirements. This is intended to ensure that retirement investors receive critical information they need to make informed investment decisions, while reducing compliance burdens. This disclosure may be new to banks, insurance companies and other types of financial institutions.
Rollover Disclosures. Amended PTE 2020-02 significantly narrows the scope of rollover‑related disclosures to include only rollover recommendations from ERISA plans and the subsequent reinvestment of those assets in IRAs and other tax-qualified accounts. These disclosures are no longer required for IRA-to-IRA rollover recommendations or recommendations to change tax-qualified account types.
This change from the current version of PTE 2020-2 does not, however, relieve the fiduciary of its obligations under the Care Obligation and Loyalty Obligation to make prudent efforts to obtain information about the fees, expenses and investment options offered in the different IRAs or tax-qualified accounts. It would be difficult for a firm to demonstrate compliance with its obligations, or to assess the adequacy of its policies and procedures, without documenting the rationale supporting such recommendations, including IRA-to-IRA rollovers.
Policies and Procedures. Financial institutions must establish, maintain and enforce written policies and procedures that are prudently designed to ensure the financial institution and its investment professionals comply with the Impartial Conduct standards and other exemption conditions. These policies and procedures must mitigate conflicts of interest to the extent that a reasonable person reviewing the policies and procedures as a whole would conclude that they do not create a financial incentive for a financial institution or investment professional to place their interests, or those of any affiliate or related entity, ahead of the interests of the retirement investor.
Insurance companies are not prohibited from offering educational and training conferences to investment professionals. It merely requires reasonable guardrails for conferences, especially if they involve travel. Financial institutions must take special care to ensure that conferences held in vacation destinations are not designed to incentivize recommendations that run counter to retirement investor interests. “Just one more” investment product sale to reach a quota threshold should not be the only thing standing between an investment professional and a luxury getaway vacation.
Amended PTE 2020-02 does not require a financial institution to eliminate all sales quotas, appraisals, performance or personnel actions, contests, special awards, differential compensation or bonuses. Instead, it prohibits incentives intended, or that a reasonable person would conclude are likely, to result in recommendations that do not meet the Care Obligation and Loyalty Obligation.
Differential compensation is permitted, but firms must manage the resulting conflicts of interest. Financial institution policies and procedures should include supervisory oversight of transaction-level conflicts created by differential compensation systems. For example, supervision should include monitoring transaction-level behavior of investment professionals at or near compensation thresholds, rollover recommendations and recommendations of proprietary products and principal-traded assets. However, the DOL cautions supervisory oversight is not an effective substitute for meaningful mitigation or elimination of dangerous compensation incentives.
Retrospective Review
Financial institutions must conduct a retrospective review, at least annually, designed to detect and prevent violations of, and achieve compliance with, Amended PTE 2020-02, including adherence to the Impartial Conduct Standards and establishing and implementing written policies and procedures that govern the compliance with the exemption’s conditions.
The methodology and results of the retrospective review must be included in a written report provided to a senior executive officer of the financial institution, who must then certify annually that they have reviewed the retrospective review report. The certification must include that the financial institution has the necessary policies and procedures in place and that the financial institution has established a prudent process to modify such policies and procedures.
The certification must be completed no later than six months after the end of the period covered by the review. The financial institution must retain the report, certification and supporting data for six years and make such documentation available to the DOL within 30 days of request.
Self-correction
A prohibited transaction will not occur due to a violation of Amended PTE 2020-02 if the following corrective conditions are met:
- Either the violation did not result in investment losses to the retirement investor or the financial institution made the retirement investor whole for any resulting losses.
- The financial institution corrects the violation.
- The correction occurs no later than 90 days after the financial institution should have learned of the violation.
- The financial institution notifies the person(s) responsible for conducting the retrospective review during the applicable review cycle and the violation and correction is specifically in the written report of the retrospective review.
If a rollover recommendation out of an ERISA plan cannot be undone, the financial institution should calculate the amount of the resulting losses, including estimated investment and tax losses, and restore the retirement investor to the position they would have occupied but for the breach.
ERISA Section 3(38) Investment Managers
To the extent a financial institution or investment professional provides fiduciary investment advice to a retirement investor as part of its response to an RFP to provide discretionary investment management services as an ERISA Section 3(38) investment manager and is subsequently hired, it may receive compensation as a result of that advice under Amended PTE 2020-02 if it complies with the Impartial Conduct Standards; the other requirements of the exemption do not apply. After being hired as a discretionary investment manager, however, the investment professional cannot rely on the relief provided by Amended PTE 2020-02. A discretionary investment manager cannot engage in any conflicted transactions without specific approval from an independent plan fiduciary in accordance with ERISA and/or Code rules.
Ineligibility
A financial institution or investment professional that is ineligible to rely on the exemption may rely on an existing statutory or separate class prohibited transaction exemption if one is available or request an individual prohibited transaction exemption from the DOL.
Recordkeeping
The financial institution must keep, for a period of six years following the covered transaction, records demonstrating compliance with Amended PTE 2020-02 and make such records available to the extent permitted by law to any authorized employee of the DOL, Treasury Department or IRS.
Upcoming eAlert
Our third and final eAlert on the fiduciary rule will cover the other PTEs amended with the final DOL rule (PTEs 84-24, 75-1, 77-4, 80-83 and 86-128).
Questions
If you have any questions about the final DOL fiduciary rule, please contact Lisa Zimmer or any member of the Funds and Investments Industry Group.
