Financial Firms: Are You Ready for DOL Fiduciary Rule Reboot?


This blog post was originally published on August 18, 2021. It was updated on December 3, 2021.

Investment firms, banks and insurance firms have a short window to comply with the new Prohibited Transaction Exemption (PTE 2020-02)

The U.S. Department of Labor (DOL) reimagined the fiduciary rule that was vacated in 2018 by the Fifth Circuit of the U.S. Court of Appeals by releasing Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees (PTE 2020-02). The new rule will have a meaningful impact to federally and state-registered investment advisers (RIAs), broker-dealers, banks, insurance companies and insurance brokers. Many firms do not realize they need to take further action, and – even with a recently extended deadline – they have a relatively short timeframe to comply.

The DOL originally set the non-enforcement compliance period to end on December 2021, but has extended this deadline to January 31, 2022, for all requirements other than the specific documentation and disclosure requirements for rollover recommendations. For those requirements, the non-enforcement policy has been extended to June 30, 2022.

The new fiduciary rule is deeply rooted in best interest and fiduciary principles, and expands the definition of fiduciary advice under Employee Retirement Income Security Act (ERISA) to include recommendations on rollovers and individual retirement account investments. Further, the DOL gives firms providing investment advice to retirement investors clear direction on how to qualify for the compensation exemptions laid out in PTE 2020-02.

Firms that currently live under Reg BI or a fiduciary standard may not necessarily be in compliance with PTE 2020-02. Now is the time to take a comprehensive look at current procedures to identify business, compliance and operational processes that will have to be created or enhanced in order to comply with the new exemption and implement any needed changes before the deadline. With a relatively short runway to comply with PTE 2020-02, firms need to take immediate action to assess their business models and compliance programs to be able to continue providing investment advice to retirement investors.

Take steps now toward PTE 2020-02 compliance

With the compliance deadline quickly approaching, firms must promptly take the necessary steps in order to have an operational and mature compliance program for PTE 2020-02 in place by the end of January. Firms should start by performing an assessment of their current practices now so they can develop policies and procedures and implement a compliance program. The following are a few areas to look at.

Conflicts of interest and disclosures

Most financial services firms regularly inventory and review conflicts of interest in order to provide adequate disclosures to their clients. Firms should review, update, or complete a comprehensive inventory of the organization’s conflicts of interest, particularly as they relate to retirement products and retirement investors. Firms should use this inventory to confirm conflicts are properly identified, disclosed, mitigated and/or eliminated.

Written disclosures will also have to be provided to the retirement investor, indicating that the investment firm is acting as, and acknowledges its status as a fiduciary, as well as describes the services being provided to the investor, and any material conflicts of interest.

Policies and procedures

A mandatory step in complying with PTE 2002-02 is having robust policies and procedures in place that address conflicts of interest, compensation, and how the firm will comply with the exemption. Firms should quickly begin reviewing, updating and/or enhancing their written supervisory procedures to properly address the compliance requirements the firm will be subject to on January 31, 2022.

The new exemption also requires firms to perform an annual retrospective review. This review will have to be designed in such a way that it tests, at a minimum, the risks, conflicts, policies and procedures, and compliance with impartial conduct standards.

The retrospective review has to be performed no less than on an annual basis, and the results have to be certified by a senior executive officer of the firm. The certification of the review by a senior executive officer may be a shift in current practices for many state and SEC-registered investment advisers, as well as some insurance providers.

Compensation arrangements

ERISA fiduciaries are prohibited from receiving certain variable compensation or compensation from third parties (e.g., mutual funds) as a result of advice provided to employee benefit plans or beneficiaries of individual retirement accounts (IRAs), which now includes rollover recommendations, as required by the exemption. However, under PTE 2020-02, financial institutions and investment professionals who provide fiduciary investment advice to retirement investors can receive compensation that would otherwise be prohibited, so long as they comply with certain requirements.

In order to receive certain variable compensation for advice given to retirement investors, firms should begin reviewing compensation arrangements with mutual funds, carriers, and/or plans to see if the firm is complying with “impartial conduct standards” as defined under ERISA. As part of its review, firms should also review compensation arrangements, with both third-parties and with advisors, to confirm the compensation is reasonable in nature (and complies with best execution requirements), and any material conflicts of interest are eliminated, mitigated, and/or disclosed properly.

Business and operational changes

Compliance with the requirements set out in the exemption will include changes not only to operational processes, but to the client experience as well. Firms and advisors that provide investment advice regarding rollovers of retirement assets will have to document the reasons the rollover is in the best interest of the client and provide the rationale to the retirement investor. This will likely impact firms’ operational process flows, recordkeeping, and written supervisory procedures.

In preparing for compliance with PTE 2020-02, firms should begin reviewing current processes and develop or update workflows and desktop procedures to include delivery of rollover recommendation rationales to retirement investors, minimum standards for record keeping, compensation arrangements, conflicts of interest, and the annual retrospective review.

Lastly, it’s advisable for firms to develop a comprehensive change management process that documents the compliance and procedural changes being implemented. This process can not only help in developing a comprehensive compliance program but will also provide evidence that the firm took reasonable steps to comply with the exemption.

Reg BI and fiduciary standard compliance is not enough

It is important to note that while most firms currently follow some best interest or fiduciary standard (e.g, Regulation Best Interest for broker-dealers and the Fiduciary Standard obligation under the Investment Adviser Act of 1940), this may give firms a false sense of security, as the DOL has stated that compliance with these standards may not necessarily be in compliance with PTE 2020-02.

Firms need to start reviewing current processes and drafting changes to their programs now, in order to meet the December compliance deadline.

For more information, visit the DOL’s frequently asked questions about PTE 2020-02 or contact Kaufman Rossin’s Risk Advisory Services team. Our team has a turn-key solution that can help broker-dealers, RIAs, banks, and insurance companies comply with the new exemption. Contact me or another member of our Risk Advisory Services practice for assistance with these and other regulatory compliance matters.

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