U.S. Department of Labor’s (“DOL”) recently published final prohibited transaction exemption regarding investment advice for IRA and ERISA plans (PTE 2020-02). This exemption became effective on February 16, 2021 allowing for a transition period to comply. Key elements include, written acknowledgments of fiduciary status by both the broker-dealer and the representative, disclosure of conflicts of interest and compensation information, the implementation of policies and procedures to mitigate or eliminate conflicts, as well as an annual reporting and certification of compliance. PTE’s conditions related to rollover recommendations went into effect on July 1st 2022.
As we have worked with clients on preparing their procedures, forms and programs for the effective date, we wanted to share a few considerations as you review your program:
Limited product offerings, including those that offer private placements
Firms that sell limited products including unregistered offerings, will need to consider the applicability of this rule. Specifically, if the Firm allows investors to use outside IRA’s to pay for the offering, they will need to ensure that they provide adequate written disclosures to clients as to why the recommendation to roll over assets is in their best interests. This means even if the Firm does not offer IRA’s as a product, compliance with this condition may still be required.
IRA to IRA Transfers
Rollovers are a broad term in the land of the DOL and can include rollovers from a plan to an IRA, from an IRA to a plan, from a plan to another plan, from a BD to an RIA plan, from an IRA to an IRA, change of account types etc. You must ensure that the disclosures, policies, and procedures you create include all relevant rollover transactions.
Review of Reasonableness of Compensation
PTE requires that a representative’s compensation is reasonable based on the value of services as determined by the competitive marketplace. Outside information can be used by Firm’s to determine these numbers. Fee’s paid to the representative and firm need to be considered to ensure that the rollover recommendation is in the investor’s best interest.
Policies and Procedures
Although the DOL has no jurisdiction over IRAs, and the SEC and FINRA have no jurisdiction over the DOL’s rule, FINRA and the SEC can still take enforcement if the firm does not follow its own procedures. In addition, the DOL can refer enforcement actions involving IRAs to the IRS. Based on the regulatory regime, it seems that the firm could open the door to regulatory risk by putting additional unnecessary procedures in place, so ensure that the procedures you put in place are customized to the Firm and fit the Firm’s business model.
Implied Recommendations
Firms who attempt to circumvent the requirements by not “recommending” the rollover but advising on the IRA after the rollover may fall into making an implied recommendation, which would require the conditions of the rule to be met. Just because you don’t say it specifically, it doesn’t mean through your communications that it wasn’t suggested. Firms should ensure training, as well as procedures, are in place so that no implied recommendations are made. If they are, then the Firm needs to ensure that representatives are trained on and use the proper firm disclosures.
For more information and to review the additional details and best practices related to the rule change, see PTE 2020-02 and DOL FAQs.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting for your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.