The deadline for financial institutions to roll out a class exemption intended to help investors and advisers was recently extended for those “working diligently, and in good faith, to comply,” according to a U.S. Department of Labor press release.
The DOL adopted the Class Prohibited Transaction Exemption 2020-02 on Dec. 18, 2020. It outlines several new measures for investment advice to retirees, but specifically allows investment professionals to profit from “12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties,” according to the Federal Register.
“The class exemption provides meaningful protections for individual investors and we continue to emphasize the importance of compliance,” said Acting Assistant Secretary of Labor for Employee Benefits Security Ali Khawar. “Based on concerns raised, we’ve concluded that providing additional transition relief for financial institutions that are working in good faith to build systems to comply with the exemption conditions is appropriate.”
Though the exemption began on February 16, 2021, transitional relief was given through December 20, 2021. Fiduciaries don’t have to comply fully with many of the exemption’s conditions during that period. Financial institutions argued that the expiration date of the relief would cause significant extra costs for financial institutions because December 20th does not align with their usual date for distributing disclosures.
In response, the DOL released Field Assistance Bulletin 2021-02, described as a “temporary enforcement policy on prohibited transaction rules applicable to investment advice fiduciaries,” on Oct. 25. It states that between Dec. 21, 2021 and Jan. 31, 2022, the DOL will not pursue prohibited transaction claims against fiduciaries working to comply with standards. All other requirements will be enforced on Feb. 1, 2022.
An article by Kim Shaw Elliot of insurancenewsnet.com was tweeted by @Brokereducation, saying that this is the DOL dropping a “bomb” on advisors who advise IRA owners.
“New interpretations voiced in the Department of Labor’s Prohibited Transaction Exemption 2020-02 could be a bomb that hits squarely on unwary wealth managers who give investment advice to IRA owners,” the tweet said.
Elliot’s article states that the profited transaction exemption, or PTE, says that most recommendations for a rollover are a fiduciary investment. The article points out that the exemption impacts all wealth managers that recommend a rollover. She added that this creates conflicts of interests, including receiving compensation for the advice to avoid hefty fines through transactions that are prohibited.
“Rollover advice is conflicted investment advice if the adviser is paid from the IRA,” Elliot wrote, adding that the good news is that the PTE provides relief.
