Best Interests Standard of Care for Advisors # 63: PTE 2020-02 Compliance: Recognition of Trustee Status | Faegre Drinker Biddle & Reath LLP

The DOL “fiduciary rule”, FAQ 13: Written recognition of fiduciary status

This series focuses on the new DOL fiduciary “rule”, which came into effect on February 16. This article and the following articles examine frequently asked questions (FAQs) published by the DOL to explain the fiduciary definition and the conflict exemption. of interest.

Key points to remember

  • The DOL FAQs generally explain PTE 2020-02 and the expanded definition of fiduciary boards.
  • FAQ 13 explains the DOL’s reasons for requiring financial institutions and investment professionals to provide retirement investors with written recognition of their fiduciary status for their recommendations.
  • Standards of impartial conduct, which do not require the declaration of fiduciary status, must be met from February 16, 2021 to December 20, 2021 under the DOL’s Non-Enforcement Policy (with IRS approval), then on December 21, all of the conditions of the PTE 2020-02 must be met, including the fiduciary recognition.

Background

DOL’s Prohibited Transaction Exemption (PTE) 2020-02 (Improved Investment Advice for Workers and Retirees) allows investment advisers, brokers, banks and insurance companies (“financial institutions”) and their representatives (“investment professionals”), receive conflicting compensation resulting from non-discretionary fiduciary investment advice to pension plans, members and IRA owners (“pension investors”). In addition, in the preamble to the PTE, the DOL announced an expanded definition of fiduciary boards, which means that many other financial institutions and investment professionals will be fiduciaries of their recommendations to retirement investors and, therefore, will have need the protection provided by the exemption.

In April, the DOL published FAQs that explain the fiduciary interpretation and the conditions of the exemption.

This article discusses FAQ 13, a question and answer from DOL on the requirement to issue a written acknowledgment of fiduciary status:

Q13. Why has the Ministry required financial institutions and investment professionals to provide retired investor clients with written recognition of their fiduciary status under Title I of ERISA and the Code?

Written Fiduciary Acknowledgment is designed to ensure that the fiduciary nature of the relationship under Title I of ERISA and / or the Code is clear to the financial institution and investment professional, as well as to the investor. pension, at the time of the recommended investment transaction. . This requirement reflects the Department’s view that parties wishing to take advantage of the general relief for transactions prohibited in the new exemption should determine up front that they are acting as trustees; tell their retired investor clients that they are providing advice as trustees; and, based on their decision to act as a trustee, implement and monitor the terms of the exemption. In assessing compliance with this condition, the Department expects financial institutions and investment professionals to be clear about their fiduciary status with respect to any transaction for which they are availing themselves of the exemption. Ambiguous statements of fiduciary status that would leave a reasonable investor in doubt as to whether a particular recommendation is made in a fiduciary capacity under Title I of ERISA or the Code are insufficient.

To help financial institutions and investment professionals comply with this condition of the exemption, the preamble to the exemption included the following language model that will satisfy the fiduciary recognition requirement:

When we provide you with investment advice regarding your retirement plan account or your individual retirement account, we are trustees within the meaning of Title I of the Act respecting the security of employee retirement income and / or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. . The way we make money creates conflicts with your interests, so we operate under a special rule that requires us to act in your best interests and not to put our best interests ahead of yours. Under the provisions of this special rule, we must:

  • Adhere to a standard of professional diligence when making investment recommendations (giving careful advice);
  • Never put our financial interests ahead of yours when making recommendations (giving faithful advice);
  • Avoid misleading statements about conflicts of interest, fees and investments;
  • Follow policies and procedures designed to ensure that we provide advice that is in your best interest;
  • Not charge more than is reasonable for our services; and
  • Give you basic information about conflicts of interest.

To be clear, this is a language suggested by the DOL. In a sense, this could be seen as a “safe harbor” recognition. However, this language includes much more than what is required by PTE 2020-02. For example, the suggested acknowledgment explains in detail what fiduciary status means. This is not required by the TEP itself. As a result, financial institutions may consider writing simpler and more direct statements of their fiduciary status. On the other hand, when the DOL provides an example of language, it may be advantageous to use it, for example, if a DOL survey takes place in the future, the interviewer will easily recognize and accept this language.

Concluding thoughts

First, dealers and investment advisers should be prepared to provide written recognition of fiduciary status (under ERISA and the Code) to retired investors on or after December 21, 2021. They can use the language of the DOL form or write their own, so as long as it satisfies the PTE 2020-02.

However, brokers and investment advisers probably shouldn’t rely on their current disclosure documents, such as Reg BI disclosures, CRS forms, or ADV form. There is nothing in the SEC guidelines for such disclosures that would be equivalent to fiduciary disclosure under PTE 2020-02. For example, the PTE requires disclosure as a trustee under Title I of ERISA and / or under the Internal Revenue Code. A disclosure of fiduciary status under securities laws relates to a different status subject to a different set of rules. Exemptions from prohibited transactions generally require strict adherence to their conditions.

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