While some firms are working diligently, spending millions to comply with a new Department of Labor rule on prohibited advice for retirement plan and retirement rollovers, other firms are failing or still believe the rules just don’t apply to them, said Fred Reish, a nationally recognized expert on the rule.
The new rule is called “PTE 2020-02: Improving Investment Advice for Workers & Retirees.” It creates an expanded definition of fiduciary advice, one that requires advisors, broker-dealers and the reps of other financial institutions to meet several requirements if they want exemptions for certain types of transactions (those involving commissions, revenue sharing or 12b-1 fees and other types of compensation where there is a perceived conflict of interest).
“Unfortunately, we are already seeing that some broker-dealers and investment advisors have not fully complied with the exemption’s conditions, at least in connection with some of their recommendations,” wrote Reish, a partner in the law firm of Faegre Drinker and noted DOL rule expert, in his latest blog.
Among the compliance failures Faegre Drinker is seeing:
- A failure by firms to provide retirement investors with the new acknowledgement that they are acting in a fiduciary capacity.
- A failure by advisors to understand that the new rules apply to recommendations that transfer IRAs to their firms from other firms.
- A failure to have policies and procedures that mute the conflicts of interest of both the firms and the individual advisors.
- A failure to disclose that plan-to-IRA rollover recommendations and IRA-to-IRA transfer recommendations are conflicts of interest.
“Beyond that, I am concerned that some firms may not realize that, beginning July 1, they need to give retirement investors the specific reasons, in writing, why a plan-to-IRA rollover or IRA-to-IRA transfer is in the best interest of the retirement investor,” Reish said.
Firms that are failing in these efforts should immediately begin to “self-correct” as soon as possible, he said.
Specifically, the DOL wants to see financial institutions correct violations and notify the agency of any violation via email within 30 days after making the corrections. Those self-corrections must occur within 90 days of a firm discovering the violation. To avoid a possible enforcement action, the DOL specifies in the rule that firms must self-correct and compensate investors who lost money because of recommendations that fell outside the rule’s bounds.
Without self-correction, “the failure to satisfy the requirements in the [prohibited transaction exemption] will cause the compensation earned by the firm and the investment professional to be a prohibited transaction,” Reish said. That can lead to penalties and a loss of compensation.
Violations that a firm corrects on its own will not fall under prohibited transactions as long as there were no investor losses or the losses were made whole by the firms.
Reish says there is a gray area with “investment losses”—that these are not likely to refer to market volatility but probably will include investor expenses, including increased fees and costs, such as higher expenses that were collected in a rollover IRA than would have been in a retirement plan, expenses that might have continued year after year, for decades, Reish warned.