On April 13, 2021, the Department of Labor (DOL) issued clarifying guidance for Prohibited Transaction Exemption (PTE) 2020-02, Improving Investment Advice for Workers & Retirees, which became effective on February 16, 2021.

Adopted in December 2020, PTE 2020-02 allows investment advice fiduciaries to receive compensation as a result of providing fiduciary investment advice if that advice meets the DOL’s “Impartial Conduct Standards,” which include (1) a best interest standard, (2) a reasonable compensation standard, and (3) a requirement to make no materially misleading statements about recommended investment transactions and other relevant matters.

The DOL guidance for investment advice providers comes in a series of 21 FAQs that address three main subjects:

Compliance Dates

The FAQs on compliance dates reiterate that the new exemption went into effect on February 16, 2021, and that prior guidance under FAB 2018-02 will remain in effect until December 20, 2021, to provide a transition period for compliance with the provisions of the new exemption. The DOL anticipates taking further actions, including amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking some of the other existing class exemptions available to investment advice fiduciaries.

Definition of Fiduciary Investment Advice

For advice to constitute “investment advice,” a financial institution or investment professional that is not a fiduciary under ERISA must:

  1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
  2. On a regular basis,
  3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary, or IRA owner, that
  4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
  5. The advice will be individualized based on the particular needs of the plan or IRA.

Under the new exemption, a financial institution or investment professional that meets the five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA and under the Code. The FAQs also summarize the DOL’s reinterpretation of the five-part test to cover IRA rollover advice and additional clarification for investment advice providers that written disclaimers to avoid fiduciary status may be considered, but are not determinative, in determining whether a “mutual understanding” exists.

PTE 2020-02 Compliance

This section of the FAQs addresses specific PTE 2020-02 requirements, including the impartial conduct requirement, written acknowledgment of fiduciary status, disclosure of conflicts of interest, documentation of rollover advice, and annual retrospective reviews. The FAQs also provide specifics on factors that investment professionals and financial institutions should consider and document when making rollover recommendations; what financial institutions must do to mitigate conflicts of interest; considerations for the use of compensation payout grids; how insurance companies can comply with PTE 2020-02; and a correction procedure for financial institutions to correct certain violations.