Annual Retrospective Review – What does it Mean for Advisors?

  

Annual Retrospective Review - What Does it Mean for Advisors?

The DOL’s Prohibited Transaction Exemption (PTE) 2020-02 (Improving Investment Advice for Worker’s & Retirees) gives registered investment Advisors and their representatives the ability to receive compensation when providing investment advice to ERISA retirement plans, participants, and IRA owners. AdvisorAssist has previously provided guidance on the requirements of PTE 2020-02 in the corresponding blog post, but this post elaborates on the regulatory requirement for Investment Advisors regarding the Annual Retrospective Review. As a reminder, Advisors must conduct an Annual Retrospective Review and record their findings in a written report within six (6) months after the end of the year, or by June 30th.

The DOL has published FAQs, which provide additional guidance regarding an Advisor’s requirement to perform an Annual Retrospective Review of their covered recommendations in Question 19. Defined, the Annual Retrospective Review is a review that must be reasonably designed to assist the Investment Advisor in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the Advisor’s policies and procedures. Whichever methodology the Advisor chooses for their review, and its applicable results, must be reduced to a written report. This written report can either be provided to a Senior Executive Officer of the firm, or as circumstances require, created by the Senior Executive Officer in cases of smaller sized firms.. The officer required to certify the report will be attesting that they have reviewed the report in its entirety, inclusive of any violations, and that the Advisor has policies and procedures in place prudently design to achieve compliance with the exemption. Investment Advisors are required to retain the report, certification, and applicable supporting data for a period of six years along with the ability to produce these documents to the DOL within ten business days if requested.

When Investment Advisors are reviewing, assessing, and documenting the Firm’s overall control environment in regards to PTE 2020-02 and the Impartial Conduct Standards, they should review their current control framework by asking such questions as:

• Does the Advisor have a prudent process to modify current policies and procedures as business, regulatory and legislative changes and events dictate?
• Does the Advisor have the ability to test the effectiveness of the policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with the conditions of this exemption?
• When reviewing Advisor’s current internal work flows, do they align with what is currently published in written manuals?
• Does the Advisor have policies and procedures which ensure compliance with the Impartial Conduct Standards including:
• How an Advisor investigates and evaluates investments, provides advice, and the requirement to act prudently in their recommendations?
• That an Advisor acts with loyalty when making recommendations and never places their own interest ahead of the client?
• That an Advisor charges no more than reasonable compensation and complies with federal best execution laws?
• That an Advisor can not make misleading statements about investment transactions, or related data points, to entice clients into transactions?
• Has the Advisor mitigated any conflicts of interest that may affect them, and adequately documented how those conflicts are mitigated?
• Does the Advisor provide applicable written acknowledgments of the firm's ERISA fiduciary status?
• Does the Advisor have a process in place to identify all covered transactions during the review timeframe, and furthermore delineate those results into solicited transactions versus client-initiated transactions?
• For any client-directed rollovers, does the firm provide clients with a separate and distinct acknowledgment form where the client attested that the firm did not solicit the rollover?
• How is the Advisor tracking document and disclosure delivery, and can the Advisor prove all applicable documents and disclosures were delivered when required?
• Does each solicited transaction document the specific reasons for recommendations made to retirement clients, applicable due diligence conducted, costs associated, and whether the recommendation was in the client’s best interest?

PTE 2020-02 does contain the ability for Investment Advisors to correct certain violations within 90 days after the Investment Advisor learns, or reasonably should have learned, of the violation. Assuming the violation did not cause investment losses to the retirement client, and/or the Investment Advisor has made the client whole, the firm needs to notify the Department within 30 days, and the violation and correction must be specifically set forth in the written report of the retrospective review. Although not an exhaustive list, certain examples of violations could be:

• A transaction that inherently violates the Impartial Conduct Standards, and does not align to the fiduciary standards placed on representatives.
• Not having adequate policies and procedures to comply with all components of PTE 2020-02 or an update mechanism to enhance for any corresponding internal or external change required such as new business lines, enhanced regulations, etc.
• Not disclosing material conflicts and/or not providing required documentation and disclosures to the client during the transaction process which could have a material impact on their decision making such as:
• Not providing a comparable review of the costs associated with the current plan versus the proposed investment solution such as internal expense ratios, advisory fees, custodial fees, commissions, etc.
• Not providing a comparable review of the account characteristics of the current plan versus the proposed investment solution i.e legal protections, surrender timeframes, loan applicability, and/or tax ramifications.
• Not providing a comparable review of the characteristics of the current plan’s investment options versus the proposed investment solution such as product type availability or, share class availability.

With the results of the Retrospective Review in hand, Investment Advisors can find more effective ways to ensure their representatives are providing investment advice that aligns to the Impartial Conduct Standards, and strengthen the firm’s policies and procedures. AdvisorAssist Consultants are here and ready to assist Adviser’s in any compliance capacity needed. Should you have questions, please don’t hesitate to reach out today.

Posted in: DOL,DOL Compliance,PTE 2020-02