Proposed Amendment to Prohibited Transaction Exemption 2020-02

In connection with a consultation on a proposed new definition of an „investment advice fiduciary“ which would expand the scope of such to include all individuals and entities that provide investment advice or make investment recommendations whether it be to a pension plan or individual investors (EventID 23651), the Employee Benefits Security Administration (EBSA) has launched a consultation on changes to the Prohibited Transaction Exemption PTE 2020–02.
PTE 2020–02 permits investment advice fiduciaries to receive compensation, even for advising on transferring assets from a plan to an IRA (rollover), and to engage in principal transactions that would otherwise be prohibited so long as they meet certain requirements including the minimization of conflicts of interest and ensuring that they act prudently and loyally toward investors. Specifically, to rely on PTE 2020-02, advisors are required to acknowledge their fiduciary status, disclose relevant information on services they offer and on (potential) conflicts of interest, adhere to certain standards like being prudent and acting in the investor’s best interest, charge reasonable fees, and avoid misleading information for those they are advising. Advisors must also have policies and procedures in place to comply with these standards, explain why certain recommendations are best for investors, and conduct annual compliance reviews.
The proposed changes aim to further enhance protections for investors, although indirectly, by requiring financial institutions, as part of their mandatory retrospective review, to report any non-exempt prohibited transactions in connection with fiduciary investment advice by filing IRS Form 5330, correcting those transactions, and paying any resulting excise taxes. Moreover, a violation to do so would result in the ineligibility to rely on PTE 2020–02 for a period of ten years.