Key Takeaways

• Beginning February 1, 2022, investment managers providing fiduciary advice in connection with making IRA rollover recommendations must comply with prohibited transaction exemption PTE 2020-02.
• Investment managers with a separate account business model will likely be impacted by the new DOL rule.
• If you offer separate accounts to IRA clients, you should confirm or establish policies and procedures that comply with PTE 2020-02 before January 31, 2022.

On December 18, 2020, the U.S. Department of Labor (the “DOL”) adopted prohibited transaction exemption 2020-02, titled “Improving Investment Advice for Workers & Retirees” (“PTE 2020-02”). The exemption became effective on February 16, 2021; however, the DOL announced a non-enforcement policy effective until January 31, 2022. Beginning February 1, 2022, investment managers providing fiduciary advice in connection with making IRA rollover recommendations must comply with a prohibited transaction exemption at that time. The DOL additionally provided that, until June 30, 2022, it would not pursue prohibited transaction claims against investment advice fiduciaries who otherwise complied with PTE 2020-02 based on the fiduciary’s failure to comply with certain disclosure and documentation requirements.

The DOL’s new position is that a recommendation to rollover assets to an IRA, when it is part of an ongoing relationship or when it is the beginning of an intended future ongoing relationship, would likely be investment advice subject to the prohibited transaction regime of ERISA and the U.S. Internal Revenue Code. Managers with a separate account business model often recommend clients rollover pension accounts, which under the DOL’s new guidance would likely be fiduciary investment advice and therefore would constitute a prohibited transaction. PTE 2020-02 provides an exemption which will allow managers providing fiduciary investment advice to continue to make such rollover recommendations.

The major requirements of PTE 2020-02 are:

• Acknowledgement of fiduciary status in writing
• Documentation of why the rollover was appropriate in that specific situation
• Adoption of written policies and procedures to ensure compliance with the “impartial conduct standard”, which require:
  • Giving advice that is in the “best interest” of the retirement investor, including meeting a professional standard of care as specified in the text of PTE 2020-02 and not placing the adviser’s own interests ahead of those of the retirement investor
  • Charging no more than reasonable compensation and complying with federal securities laws regarding “best execution”
  • Making no misleading statements about investment transactions and other relevant matters
• Disclosure of conflicts of interest and written policies and procedures to mitigate conflicts
• Annual compliance review.

The deadline of February 1, 2022 is rapidly approaching, and we recommend contacting your primary S&K contact, S. John Ryan at (212) 574-1679, Michael O’Brien at (212) 574-1505, or Bradley Fay at (212) 574-1429, if you offer separate accounts for IRA clients to confirm or establish policies and procedure that comply with PTE 2020-02.