Financial transaction

Advisor Best Interests Standard of Care #99: The PTE 2020-02 Requirement for an Annual Retrospective Review | Faegre Drinker Biddle & Reath LLP

Key points to remember

The DOL’s expanded definition of fiduciary boards is explained in the preamble to TEP 2020-02.

When conflicting fiduciary advice is given to pension investors (i.e. pension plans, participants (including rollovers) and IRA owners (including IRA transfers), it results in prohibited transactions under the Internal Revenue Code and ERISA conflicting non-discretionary recommendations However, the exemption is only available if all conditions of the PTE are met.

While much attention has been paid to the “conditions” of conduct, disclosure, and policies for obtaining the relief provided by PTE 2020-02, there has not been much discussion of the “condition” of the PTE which requires an annual retrospective review and report. This article discusses this requirement.


The DOL Prohibited Transaction Exemption (PTE) 2020-02 (Improved investment advice for workers and retirees), allows investment advisers, broker-dealers, banks and insurance companies (“financial institutions”) and their representatives (“investment professionals”) to receive conflicting compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations) and IRA owners (all of whom are referred to as “retirement investors”). In addition, in the preamble to the PTE, the DOL announced an expanded definition of fiduciary advice, which means that many more financial institutions and investment professionals are fiduciaries for their recommendations to pension investors and, by therefore, will need the protection afforded by the exemption.

For example, a rollover recommendation will generally be non-discretionary fiduciary advice and will result in a financial conflict of interest (i.e. compensation obtained from the Rollover IRA) which is a prohibited transaction under the ERISA and the Internal Revenue Code. But, since the recommendation is non-discretionary, PTE 2020-02 provides relief, but only if all of its conditions are met.

These conditions are:

  • Adherence to standards of impartial conduct.
  • Provide the four required pieces of information.
  • Adopt and implement required policies and procedures.
  • Conduct an annual retrospective review and document the findings in a written report.

The first three of these conditions had to be met on February 1, 2022, with the exception of the requirement to provide pension investors with specific reasons why a rollover recommendation is in their best interests. This requirement came into effect on July 1, 2022.

But the fourth condition – the annual retrospective review – can only be met next year, as it involves a review of the recommendations covered in 2022. Before discussing the annual review requirement, I should point out that this is a condition of the exemption. This means that if the review is not completed and the report is not certified as required, the financial institution (for example, broker or RIA company) has not met the requirements of the PTE and the relief provided by the PTE is not available. As a result, all covered referrals for the year, including rollover referrals, would be prohibited transactions, with disastrous consequences…possible damages, loss of compensation, accrued interest on compensation until recovery , penalties and excise taxes. The preamble to TEP 2020-02 explains:

In response to commenters who asked the Department to clarify the consequences of a violation discovered during the retrospective review, and to other commenters who asked for the opportunity to correct compliance issues discovered during the review, the Department included a self-correction feature in the final exemption, as described below. If self-correction is not available or if a financial institution decides not to self-correct, the financial institution remains liable for a prohibited transaction associated with the failed transaction.

Now let’s look at the requirement in the PTE:

Retrospective review.

  1. The Financial Institution conducts a retrospective review, at least annually, that is reasonably designed to assist the Financial Institution in detecting and preventing violations of the Standards of Impartial Conduct and policies and procedures governing compliance with exemption, and to comply with them.
  2. The retrospective review methodology and results are reduced to a written report that is delivered to a senior manager.
  3. A senior executive of the Financial Institution certifies annually that:
    1. The officer reviewed the retrospective review report;
    2. The financial institution has implemented policies and procedures carefully designed to comply with the terms of this exemption; and
    3. The Financial Institution has implemented a prudent process to modify these policies and procedures in response to business, regulatory and legislative changes and events, and to test the effectiveness of these policies and procedures on a periodic basis, including the timing and scope are reasonably intended to ensure continued compliance with the terms of this exemption.
  4. The review, report and certification are completed no later than six months after the end of the review period.
  5. The financial institution retains the report, certification and supporting data for a period of six years and makes the report, certification and supporting data available to the Department, within 10 business days of request, to the extent permitted by law, including 12 USC 484

The requirements are quite simple. A review must be made of covered recommendations that have been made within the previous year and the review must be documented in a report, which must be certified by a senior company official within 6 months of the end of the year under review.

If the senior manager does not have the expertise to properly certify the report, the leader should seek competent help. The preamble says: If the agent does not have the experience or expertise to determine whether to certify, they will be expected to consult with a qualified compliance professional in order to do so.

There are unanswered questions, however. How comprehensive should the sampling of recommendations be? The provision states that the examination must be “reasonably designed to assist the Financial Institution in detecting, preventing and complying with violations of the Standards of Fair Conduct and the policies and procedures governing compliance with the exemption. » Although the DOL does not say so, it appears that the scope of the exam is a statistical matter in the sense that the exam must be “reasonably designed” to achieve its objectives.

The preamble also deals with the review and provides some guidance. Here is what he says: The retrospective review is based on FINRA rules governing how broker-dealers manage associated persons, adapted to focus on the terms of the exemption.

This statement is accompanied by the following footnote: See FINRA rules 3110, 3120 and 3130.

Therefore, companies familiar with these FINRA rules should have a good idea of ​​what is expected. Others may want to refer to these rules.

Note, however, that the preamble also says: In order to maintain this principles-based approach, the Department has not imposed specific detailed elements of post-mortem examination. Financial institutions will be free to design the review process in the context of their own business models and the particular conflicts of interest they face.

The preamble adds, referring to the review: …the Department clarifies that an appropriate post-examination review would seek to detect non-compliance across a wide range of transaction types and sizes, large and small, identify deficiencies in policies and procedures, and correct those deficiencies…c is an important and necessary component of any careful review process and should be carried out in such a way as to identify potential breaches, issues and deficiencies that need to be corrected.

During the execution of the review, companies may discover covered recommendations where one or more of the PTE conditions were not met. The PTE anticipated this and has a self-correction provision which, if followed, allows the company to avoid the prohibited transaction consequences of failure. See Best Interest #93. Note that discovered failures and self-corrections should be included in the report. The self-correction provision in the PTE has 4 requirements, and the fourth is: The Financial Institution shall notify the person(s) performing the post-mortem review during the applicable review cycle and the violation and the correction are specifically stated in the written report of the retrospective review required under subparagraph II(d)(2).

Finally, records reviewed for the retrospective review must be retained for six years. The ETP offers:

The financial institution retains the report, certification and supporting data for a period of six years and makes the report, certification and supporting data available to the Department, within 10 business days of request, to the extent permitted by statute, including 12 U.S.C. 484.

Although not entirely clear, it appears that the “supporting data” would be the documentation showing that the conditions of the ETP have been met. This would include, for example, data that, for rollover recommendations, demonstrates that required information about the plan and/or IRA has been obtained and reviewed, that the retirement investor has received the specific reason for a rollover recommendation was in the best interest of the investor, that disclosures were provided and that other conditions were met. Unfortunately, the preamble does not give a better insight into the expectations of the DOL. However, it seems difficult to imagine how the annual review of covered transactions could be done without reviewing the recommendations at this level of detail.

Final Thoughts

Even though the retrospective review will not start until next year (2023), preparations should start now. Companies must be able to easily identify all recommendations covered in order to proceed with the review. Therefore, companies should be well advised to have an intake process that identifies recommendations and transactions covered, so that they can be retrieved for review.

In addition, firms should have a documentation retention policy that allows them to retrospectively review information considered for the purpose of making these recommendations.

Retrospective review will be difficult without the ability to identify covered transactions and without the ability to retrieve the information necessary to determine whether a recommendation was in the best interest of a retired investor.