PLANADVISER - July/August 2022 - 39

ERISA vista
Fred Reish and Joan Neri
If Caught Off Guard by a Failure
Advisers can self-correct some violations of PTE 2020-02
QUESTION: I'm a registered investment adviser who works
with individuals. When I recommend that a plan participant
roll over his or her account to an individual retirement
account that I'll manage, I know I must comply with
Prohibited Transaction Exemption 2020-02, " Improving
Investment Advice for Workers and Retirees, " in order
to avoid a prohibited transaction. Still, I'm concerned I'll
overlook satisfying all of the PTE's requirements. What
should I do if I discover a failure to comply?
ANSWER: The PTE has a self-correction procedure you'll need
to follow to avoid a prohibited transaction. Unfortunately,
some conditions of this procedure are difficult to interpret
without additional guidance from the Department of Labor.
You aren't alone in the concern you cite. We're already
seeing a number of PTE failures, including the following:
* Failure to provide an adequate and/or timely fiduciary
acknowledgment under the Employee Retirement Income
Security Act and/or the Internal Revenue Code;
* Failure to recognize that the PTE is needed for recommending
a transfer from an existing IRA with another firm
to an IRA with your firm;
* Failure to disclose that plan-to-IRA rollover recommendations
and IRA-to-IRA transfer recommendations are
conflicts of interest; and
* Starting July 1, failure to disclose the specific reasons
why either of the above transactions involving IRAs is in
the investor's best interest.
If you fail to satisfy the PTE's conditions, your compensation
from the rollover IRA is a prohibited transaction. The
consequences are costly. A fiduciary adviser who engages in a
prohibited transaction must pay back the prohibited compensation,
plus lost earnings on that amount. The adviser also
needs to file a Form 5330 with the IRS and pay an excise tax of
15% of the amount involved, increased to 100% if the prohibited
transaction is not resolved in good time.
Fortunately, if the self-correction process is satisfied-
i.e., by meeting the four conditions below-the failure will
not be treated as a prohibited transaction:
1) The failure did not result in investment losses to the
investor, or, if losses did result, the firm made the investor
whole. There is no guidance on what is meant by " investment
loss. " It is unlikely this would cover a loss resulting
from normal market fluctuations, as long as you prudently
selected the investments in the rollover IRA and they were
reasonably priced. Yet, it's possible that investment loss
could refer to the increased fees and costs that may result
in the rollover IRA. If so, this raises the issue of whether
the correction should include the ongoing effect of the such
higher expenses.
2) The firm corrects the violation and notifies the DOL to the
pertinent facts thereof, via email at IIAWR@dol.gov, within
30 days of correction. This condition can be challenging if
there are systemic failures. For instance, let's suppose you
discover that the disclosure form you've used for all rollover
recommendations lacked the required conflict of interest
disclosure. Now you have a widespread failure affecting all
rollover recommendations, and you will need to notify the
DOL accordingly. The department gives no further explanation
as to correcting the violation, but a reasonable interpretation
is you would be required to supply the conflicts
disclosure to those clients.
3) The correction is made no later than 90 days after the
firm learns of the violation or reasonably should have
learned about it. The best way to satisfy this condition is to
closely supervise or review rollover recommendations. This
way, the failure will be discovered and remedied quickly.
4) The firm notifies the person responsible for conducting
the retrospective review during the relevant review cycle,
and the violation and correction are specifically set forth
in the written report. This condition is easy to carry out.
The firm should identify in its policies and procedures the
person responsible for conducting the retrospective annual
review-usually the chief compliance officer-and train
staff to report PTE failures to that person.
While it's important to have good processes and documentation
for rollover recommendations, it's also important
to closely supervise such recommendations to ensure
the processes are followed and to promptly identify and
correct any failures. Hopefully, the DOL will issue guidance
to address and clarify the unanswered questions. We
will keep you posted.
Fred Reish is chairman of the financial services ERISA practice
at law firm Faegre Drinker Biddle & Reath LLP. Joan Neri,
a nationally recognized expert in employee benefits law, is
counsel in the firm's financial services ERISA practice.
Art by Tim Bower planadviser.com July-August 2022 | 39
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PLANADVISER - July/August 2022

Table of Contents for the Digital Edition of PLANADVISER - July/August 2022

Balancing Act
Greater Access
Previewing Plan Features
A Different Way to Save
Next-Level Options
New Territory for Income?
Compliance for Wealth Managers
If Caught Off Guard by A Failure
Larry E. Crocker
PLANADVISER - July/August 2022 - C1
PLANADVISER - July/August 2022 - FC1
PLANADVISER - July/August 2022 - FC2
PLANADVISER - July/August 2022 - C2
PLANADVISER - July/August 2022 - 1
PLANADVISER - July/August 2022 - 2
PLANADVISER - July/August 2022 - 3
PLANADVISER - July/August 2022 - 4
PLANADVISER - July/August 2022 - 5
PLANADVISER - July/August 2022 - 6
PLANADVISER - July/August 2022 - 7
PLANADVISER - July/August 2022 - 8
PLANADVISER - July/August 2022 - 9
PLANADVISER - July/August 2022 - 10
PLANADVISER - July/August 2022 - 11
PLANADVISER - July/August 2022 - 12
PLANADVISER - July/August 2022 - 13
PLANADVISER - July/August 2022 - 14
PLANADVISER - July/August 2022 - 15
PLANADVISER - July/August 2022 - Balancing Act
PLANADVISER - July/August 2022 - 17
PLANADVISER - July/August 2022 - 18
PLANADVISER - July/August 2022 - 19
PLANADVISER - July/August 2022 - Greater Access
PLANADVISER - July/August 2022 - 21
PLANADVISER - July/August 2022 - 22
PLANADVISER - July/August 2022 - 23
PLANADVISER - July/August 2022 - Previewing Plan Features
PLANADVISER - July/August 2022 - 25
PLANADVISER - July/August 2022 - 26
PLANADVISER - July/August 2022 - 27
PLANADVISER - July/August 2022 - A Different Way to Save
PLANADVISER - July/August 2022 - 29
PLANADVISER - July/August 2022 - 30
PLANADVISER - July/August 2022 - 31
PLANADVISER - July/August 2022 - Next-Level Options
PLANADVISER - July/August 2022 - 33
PLANADVISER - July/August 2022 - 34
PLANADVISER - July/August 2022 - 35
PLANADVISER - July/August 2022 - New Territory for Income?
PLANADVISER - July/August 2022 - 37
PLANADVISER - July/August 2022 - Compliance for Wealth Managers
PLANADVISER - July/August 2022 - If Caught Off Guard by A Failure
PLANADVISER - July/August 2022 - Larry E. Crocker
PLANADVISER - July/August 2022 - Cover3
PLANADVISER - July/August 2022 - Cover4
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