Adopted Amendment - DOL Prohibited Transaction Exemption 2020-02 (PTE 2020-02)

 

Adopted Amendment: Department of Labor's Prohibited Transaction Exemption 2020-02 (PTE 2020-02)

The Department of Labor (DOL) recently announced significant amendments to Prohibited Transaction Exemption (PTE) 2020-02, which affects Registered Investment Advisors (“RIA”). As we continue through our research on these amendments we are learning that nothing has changed from our guidance since the DOL released its initial communication on PTE-2020-02, and that our guidance still aligns with the amendments, as all RIA’s are subject to a fiduciary standard. That said, here’s what you need to know about the amendment to PTE-2020-02: Effective Date - The amended rule takes effect on September 23, 2024. The DOL is granting this practical buffer through a designated phase-in period, to give RIAs the appropriate amount of time to make adjustments in order to adhere to the amended rule. There are two (2) material changes we wanted to highlight as it relates to this amendment: Inclusion of the Fiduciary Standard: The amendment to PTE 2020-02 allows investment advice fiduciaries to receive compensation that would otherwise be prohibited under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. The amendment provides a further definition of what is constituted as “Fiduciary Advice” based on the following five-part test:

• they provide investment advice for a fee,
• on a regular basis,
• pursuant to a mutual understanding,
• that the advice will serve as a primary basis for investment decisions, and
• that the advice is individualized.

Based on the above, this applies to the majority of RIA’s, registered with the SEC and/or various state regulators, who provide ongoing investment advice to clients. The following are key features to meet the Fiduciary Standard:

• Fiduciary Acknowledgment: RIAs must formally acknowledge their fiduciary status in writing to retirement investors. This declaration is crucial as it reaffirms the advisor’s role and the associated responsibilities.
• Conflict Disclosure: Advisors must fully disclose the services provided and any material conflicts of interest to their clients. Transparency is key to maintaining trust and adherence to fiduciary duties.
• Impartial Conduct Standards:
1. Care Obligation - Advisors must provide advice that reflects the care, skill, prudence, and diligence under prevailing circumstances that a prudent person would exercise.
2. Loyalty Obligation: The interests of the retirement investor must always be placed ahead of the advisor’s or the firm’s interests.
3. Reasonable Compensation: The compensation for advice must not exceed what is considered reasonable within the industry.
4. No Misleading Statements: Advisors must avoid making statements that could mislead retirement investors about investment transactions and other relevant matters.

Clarity Related to Retirement Investors The amendments now clarifies that this exemption applies to investment recommendations to “Retirement Investors”, which is inclusive of plans, plan participants, beneficiaries, IRAs, IRA owners and beneficiaries, and plan fiduciaries with discretionary authority. Although implied, this was not clear in the earlier release of the exemption. Now this answers a lot of questions on whether or not IRAs are subject to the rule. AdvisorAssist is closely monitoring industry best practices, interpretations, and any additional guidance the DOL may provide. We anticipate more clarity from the DOL as feedback comes in, and have begun the process to fully analyze and formulate guidance to help ensure adherence to amendments to PTE 2020-02. Please contact your Consultant for further questions regarding this amendment.  

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