DOL Releases New Investment Advice: Prohibited Transaction Exemption FAQs

On April 13, 2021, the Department of Labor (DOL) issued guidance to help investment advisors more fully understand the Prohibited Transaction Exemption (PTE) 2020-02, which went into effect on February 16, 2021. 

PTE 2020-02 allows certain investment advice fiduciaries — registered investment advisers, broker-dealers, insurance companies, banks, and individual investment professionals that are their employees or agents — to receive compensation as a result of providing fiduciary investment advice if that advice meets the DOL’s “Impartial Conduct Standards,” which include (1) a best interest standard, (2) a reasonable compensation standard, and (3) a requirement to make no materially misleading statements about recommended investment transactions and other relevant matters. 

FAQs for Investment Advice Providers

There are 21 FAQs for investment advice providers that provide background information on PTE 2020-02 and address the following three subjects:

Compliance Dates. The DOL confirms that PTE 2020-02 became effective as scheduled on February 16, 2021 and that prior guidance under FAB 2018-02 will remain in effect until December 20, 2021. 

Definition of Fiduciary Investment Advice. This FAQ section summarizes the five-part test for determining when recommendations count as investment advice and how the DOL has reinterpreted that test for IRA rollover advice. The FAQs also clarify that written statements disclaiming a “mutual” understanding or forbidding reliance on the advice as “a primary basis for investment decisions” may be considered in determining whether a mutual understanding exists, such statements will not be determinative.

Compliance with PTE 2020-02. This section covers the specific requirements of PTE 2020-02 and provides greater detail on what financial institutions must do to mitigate conflicts of interest, special considerations for financial institutions that use payout grids, and compliance requirements for insurance companies and agents.

In addition, the FAQs state that the DOL continues to review issues of fact, law, and policy related to PTE 2020-02 and anticipates taking further regulatory actions, as appropriate, including amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking some of the other existing class exemptions available to investment advice fiduciaries.

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