DOL fiduciary rule: Best practices for navigating retrospective reviews

Broker-dealers and RIAs must meet key obligations for reviews under DOL PTE 2020-02

In the world of financial services, staying abreast of changes in the regulatory landscape is paramount to meeting fiduciary requirements and upholding the best interests of clients.

The U.S. Department of Labor’s Prohibited Transaction Exemption 2020-02 (DOL PTE 2020-02) introduced new obligations for broker-dealers and registered investment advisers (RIAs), including the annual retrospective review requirement. Conducting these reviews diligently and effectively is crucial to demonstrate adherence to the Impartial Conduct Standard required under DOL PTE 2020-02.

As such, there are several key obligations and best practices that Broker-dealers and registered investment advisers should consider in conducting retrospective reviews under DOL PTE 2020-02, commonly known as the fiduciary rule.

Understanding DOL PTE 2020-02

The third iteration of the Department of Labor’s fiduciary rule, DOL PTE 2020-02, became effective on February 16, 2021, and requires broker-dealers and RIAs to act in the best interest of their clients when providing investment advice related to retirement accounts. The DOL regulation provides exemptions to what otherwise would be prohibited transactions under the Employee Retirement Income Security Act (ERISA).

One of the critical aspects of the exemption is the requirement for broker-dealers and registered investment advisers to conduct retrospective reviews to help identify and mitigate conflicts of interest.

Key obligations for broker-dealers and RIAs

The following are a few key obligations to keep in mind regarding retrospective reviews under DOL PTE 2020-02.

1. Adhering to timeline: The retrospective review must be completed at least annually and no later than six months following the end of the period covered by the review. For example, a review covering calendar year 2022 must be completed by July 1, 2023.
2. Establishing a comprehensive review process: Broker-dealers and registered investment advisers must develop a robust framework for conducting retrospective reviews. This process should include testing of a variety of transaction types and sizes as well as a detailed assessment of policies and procedures.
3. Identifying and documenting conflicts of interest: It’s essential for broker-dealers and registered investment advisers to proactively identify conflicts of interest that may arise from compensation structures, revenue sharing arrangements, proprietary products, or other sources. These conflicts must be documented and regularly reviewed.
4. Mitigating conflicts of interest: Once potential issues are identified, broker-dealers and RIAs must take appropriate steps to mitigate conflicts of interest. This may involve adjusting compensation structures (if necessary), implementing enhanced disclosure practices, or adopting supervisory controls, policies, and procedures to confirm recommendations are in a client’s best interest.
5. Documenting results and methodology: The results and methodology of the retrospective review must be documented in a written report. This report needs to summarize the findings and be provided to a senior executive officer of the firm or adviser. Then the senior executive officer must review the report and provide written certifications, including confirmation that the firm’s policies and procedures are prudently designed to comply with PTE 2020-02.
6. Rectifying issues: If any serious failures or deficiencies are discovered during the review, PTE 2020-02 allows for self-correction. The firm or adviser can rectify the issues within 90 days of discovery and report them, along with the corrective actions taken, to the DOL within 30 days of the correction. The DOL can be notified via email to IIAWR@dol.gov.
7. Conducting regular and ongoing enhancements: Retrospective reviews are not one-time exercises. Broker-dealers and registered investment advisers need to conduct reviews regularly and maintain a continuous process of evaluating and addressing conflicts of interest. This includes monitoring changes in the firm’s practices, products, compensation structures, and new conflicts of interest.

Best practices for conducting retrospective reviews

Broker-dealers and registered investment advisers should consider the following best practices when conducting retrospective reviews as required by the current DOL fiduciary rule.

1. Independence and objectivity: It’s important to maintain independence and objectivity throughout the retrospective review process. Broker-dealers and RIAs may consider leveraging an internal audit department or engaging an independent third party such as Kaufman Rossin to assess compliance with DOL PTE 2020-02.
2. Data analysis and technology: Leveraging data analysis tools and technology solutions can significantly enhance the effectiveness and efficiency of retrospective reviews. These tools can provide valuable insights into potential conflicts of interest.
3. Documentation and record-keeping: Detailed documentation of the retrospective review process is essential to demonstrate compliance. Broker-dealers and registered investment advisers should maintain clear records of their review, findings and mitigating actions taken.
4. Training and education: Firms and advisers should confirm that employees understand their obligations and responsibilities under DOL PTE 2020-02. Regular training and education programs can help employees stay informed and compliant with the obligations of DOL PTE 2020-02 as well as other important considerations in the evolving regulatory landscape.

Staying in compliance

Conducting retrospective reviews is a vital compliance program component for broker-dealers and registered investment advisers under the DOL’s fiduciary rule, PTE 2020-02. By establishing a comprehensive review process, identifying and mitigating conflicts of interest, and following best practices, broker-dealers and RIAs can better demonstrate their commitment to acting in the best interests of their clients. Understanding and complying with the key obligations above can assist firms in meeting their retrospective review requirements.

Kaufman Rossin has an experienced regulatory compliance team that includes former SEC and FINRA regulators. We have helped numerous clients implement procedures and processes to help them comply with DOL PTE 2020-02 and can help you satisfy your retrospective review obligations and other fiduciary requirements, while providing you with valuable insights and best practices throughout the process. Contact us to learn more about how we can help your investment firm.