PLANADVISER - November/December 2022 - 39

ERISA vista
Fred Reish and Joan Neri
Retroactive Compliance Reviews
Meet these requirements when checking for PTE 2020-02 violations
QUESTION: I'm a registered investment adviser who makes
rollover recommendations to investors about their retirement
plan and individual retirement accounts. When I
advise that a participant or IRA owner roll over her account
to an IRA I manage, I've been complying with the Employee
Benefits Security Administration's prohibited transaction
exemption 2020-02. I know I'll need to conduct a retrospective
review. What does that entail?
ANSWER: The retrospective review could be challenging if
your firm is not prepared in advance. There are steps it can
take now to facilitate the process.
The retrospective review is a condition to satisfying the
PTE. This means, if it is not carried out, the PTE's relief will
not be available. We've discussed the other PTE conditions
in a previous column about rollover advice and the standard
of care-the Impartial Conduct Standards, disclosure obligations,
and policies and procedures to ensure compliance
(see " Rollovers and Fiduciaries, " PLANADVISER, May/June
2021). The retrospective review has five components:
1) Conduct the retrospective review at least annually. The
PTE states that the retrospective review must be " reasonably
designed to assist the Financial Institution [your firm] in
detecting and preventing violations of, and achieving compliance
with, the Impartial Conduct Standards and the policies
and procedures governing compliance with the exemption. "
In the preamble to the PTE, the Department of Labor says the
retrospective review is " based on FINRA [Financial Industry
Regulatory Authority] rules governing how broker-dealers
supervise associated persons, " citing FINRA rules 3110, 3120
and 3130. The DOL explains that firms will be free to design
the process based on their own business model but that it
should be " aimed at detecting non-compliance across a wide
range of transaction types and sizes, large and small. " Therefore,
the scope of the review should be statistically based so it
is " reasonably designed " to accomplish its purpose.
2) Prepare a report setting forth the results of the review.
The review must be reduced to a written report. If, during the
review, the firm discovers that one or more of the PTE conditions
was not satisfied, those failures need to be included in
the report. The PTE provides a self-correction procedure; one
condition of that is to include a description of the violation
and correction in the report.
3) Have the report certified by a senior executive officer
of the firm. The PTE says the senior executive officer could
be either the CEO, president, chief compliance officer, chief
financial officer, or one of the three most-senior officers of
the firm. If the officer lacks the experience or expertise to
properly certify the report, then, the DOL explains, that
individual " would be expected to consult with a knowledgeable
compliance professional to be able to do so. "
4) Complete the report no later than six months following
the end of the period. For 2022, the period covered by the
review began on the PTE's effective date, which was February
1 for all conditions, excluding the written description of the
" specific reasons " why the rollover recommendation is in the
retirement investor's best interest, which was July 1. In the
preamble, the DOL explains the timeline as follows: " Because
the report is annual and retrospective, preparation of the
first report would not need to begin until at least one year
after the exemption's effective date, and the report does not
need to be completed for an additional six months after that. "
Using this February 1-when most of the conditions went
into effect-as the effective date of the PTE, this means the
retrospective report for 2022 would not need to begin until
February 1, 2023, and must be completed by July 31, 2023. As
a practical matter, most firms will probably do the reviews
on a calendar basis, with the first review beginning January
1, 2023, and being completed by June 30, 2023.
5) Retain the report and supporting data for six years. It is
likely that the supporting data would be the documentation
indicating compliance with the PTE, though this is not fully
clear. It would include the data showing that the relevant
plan and IRA information was obtained and evaluated in the
best interest of the participant or IRA owner and that the
disclosures were given to the investors in a timely manner.
In sum, firms should consider preliminary measures to
prepare for the review such as developing an intake process
for rollover recommendations and ensuring that the retention
policy captures the information that served as a basis
for the recommendation and disclosures made to investors.
Fred Reish is chairman of the financial services ERISA practice
at Faegre Drinker in Los Angeles. Joan Neri, a nationally recognized
expert in employee benefits law, is counsel in the firm's
financial services ERISA practice in Florham Park, New Jersey.
planadviser.com November-December 2022 | 39
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PLANADVISER - November/December 2022

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