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DOL Delays Enforcement of “Rollover” Rule

October 26, 2021

 

By:  Kelli Haugh

 

Last December, the Department of Labor (DOL) adopted a prohibited transaction exemption that impacts rollover recommendations provided by financial services firms, including registered investment advisors.[1] The exemption, PTE 2020-02 Improving Investment Advice for Workers & Retirees, precludes firms from receiving payments that create conflicts of interest unless they comply with the conditions set forth in the prohibited transaction exemption. Since a conflict of interest exists when a firm recommends to investors that they roll assets out of a retirement plan into an IRA that they will then manage for a fee, firms must comply with PTE 2020-02 to make such recommendations.

Firms relying on PTE 2020-02 must 1) acknowledge their fiduciary status in writing, 2) disclose their material conflicts of interest, 3) adhere to Impartial Conducts Standards, 4) adopt policies and procedures designed to ensure compliance with the Impartial Conducts Standards and to mitigate conflicts of interest that could otherwise cause violations of those standards, 5) document and disclose the specific reasons that any rollover recommendations are in the investor’s best interest, and 6) conduct a retrospective compliance review.

The DOL previously granted transitional relief through December 20, 2021 whereby it would not pursue enforcement action against firms that do not fully comply with all of the conditions of PTE 2020-02 provided that they work diligently and in good faith to comply with the Impartial Conducts Standards. As of October 25, 2021, the DOL has extended this transitional relief to January 31, 2022.[2]  In its announcement of the extension, the DOL recognized the challenges facing many firms to timely comply with all of PTE 2020-02 conditions, including implementing the rollover documentation and disclosure requirements in a systemic manner. Since the relief does not apply with respect to the Impartial Conducts Standards, firms must currently adhere to these standards, which require firms to give advice that is in the best interest of the investor, charge no more than reasonable compensation, seek to obtain best execution, and avoid making misleading statements about investment transactions or other relevant matters. Notably, these standards are similar to the fiduciary standard of care presently required of registered investment advisors.[3]

Despite the DOL’s transitional relief extension, firms are strongly encouraged to start complying with all of the conditions set forth in PTE 2020-02 as the requirements may take some time to implement.

 

 

 

[1] 29 C.F.R §2550 (2021)

[2] U.S. Department of Labor. (2021, October 25). U.S. Department of Labor Announces Temporary Enforcement Policy on Prohibited Transaction Rules Applicable to Investment Fiduciaries.

[3] Commission Interpretation Regarding Standard of Conduct for Investment Advisers. Investment Advisers Act Release No. 5248 (July, 12, 2019)

 

This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.