The DOL Provides Practical Guidance on the Application of PTE 2020-02

As described in our recent blog posts, the Department of Labor (“DOL”) recently issued guidance in the form of FAQs to address questions concerning the practical application of PTE 2020-02, Improving Investment Advice for Workers & Retirees.  This blog post discusses the guidance the DOL offers with respect to various topics under PTE 2020-02.  Guidance with respect to the general requirements of PTE 2020-02 was discussed in our prior blog post and the DOL’s guidance with respect to the application of PTE 2020-02 to rollover recommendations was discussed in our prior blog post.

Use of Disclaimers of No Mutual Understanding

As noted in our prior blog post, the regulatory definition of fiduciary investment advice provides, in part, that fiduciary investment advice is “pursuant to a mutual agreement, arrangement, or understanding.”  The FAQs indicate that the DOL intends to “consider the reasonable understandings of the parties based on the totality of the circumstances” in the determination of whether this requirement has been satisfied.  Thus, the DOL states, written disclaimers that there is no “mutual understanding” or that forbid participants from reliance on the advice given are insufficient to avoid fiduciary status and will not be determinative.

Application of PTE 2020-02 to Insurance Industry Financial Institutions

The DOL acknowledges that insurance companies market and sell their insurance products through independent insurance agents, rather than through broker-dealers and registered investment advisers.  The DOL indicates that PTE 2020-02 would still apply to these types of products to the extent offered to retirement plan investors and that independent insurance agent recommendations must satisfy the requirements of PTE 2020-02.

To that end, the DOL indicates that an insurance company must:

  • Adopt and implement appropriate supervisory and review procedures to ensure the agent’s compliance with the Impartial Conduct Standards (described in our blog post here [LINK to Blog #1]) when recommending the insurance company’s products;
  • Avoid improper incentives to induce an agent to recommend the products, riders and annuity features that are most lucrative for the insurance company;
  • Ensure that no more than reasonable compensation is paid to agents recommending its products; and
  • Comply with the disclosure and other conditions of PTE 2020-02.

The DOL suggests one avenue to compliance would be through the use of contracts with insurance intermediaries such as independent marketing organizations, field marketing organizations or brokerage general agencies.

Correction Programs for Violations of PTE 2020-02

PTE 2020-02 contains a correction program for violations of its requirements.  Violations can be corrected within 90 days after the financial institution learns, or reasonably should have learned, of the violation.  If the violation did not result in investment losses to the retirement investor or the financial institution made the retirement investor whole for any losses, then the financial institution can correct the violation and notify the DOL of the correction within 30 days of the correction.

Effective Date and Future Regulatory Action

Despite the change in Presidential administration, PTE 2020-02 became effective on February 16, 2021.  The DOL notes that the core components of PTE 2020-02 are fundamental investor protections that should not be delayed by further review; however, the DOL states that it may consider additional protections or clarifications in the future.

The DOL also clarified that its temporary non-enforcement policy for certain prohibited transactions involving advice fiduciaries, which was issued under FAB 2018-02, will remain in place until December 20, 2021.