Now that 2022 is behind us, the final steps in compliance with PTE 2020-02 must be satisfied. Those steps are (i) conducting the annual retrospective review and the resulting report (within six months) and (ii) correcting any compliance failures that are discovered in the course of the review.

The Review and Report are conditions to obtaining the relief afforded by the exemption. In other words, if they are not properly completed the protection is lost and all conflicted recommendations under the PTE are considered to be prohibited transactions. The consequence of having hundreds or even thousands of prohibited transactions is unimaginable. Here’s what the PTE says about the Retrospective Review and Report:

(d) Retrospective Review.

(1) The Financial Institution conducts a retrospective review, at least annually, that is reasonably designed to assist the Financial Institution in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the policies and procedures governing compliance with the exemption.

(2) The methodology and results of the retrospective review are reduced to a written report that is provided to a Senior Executive Officer.

(3) A Senior Executive Officer of the Financial Institution certifies, annually, that:

(A) The officer has reviewed the report of the retrospective review;

(B) The Financial Institution has in place policies and procedures prudently designed to achieve compliance with the conditions of this exemption; and

(C) The Financial Institution has in place a prudent process to modify such policies and procedures as business, regulatory, and legislative changes and events dictate, and to test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with the conditions of this exemption.

(4) The review, report and certification are completed no later than six months following the end of the period covered by the review.

(5) The Financial Institution retains the report, certification, and supporting data for a period of six years and makes the report, certification, and supporting data available to the Department, within 10 business days of request, to the extent permitted by law including 12 U.S.C. 484.

In a prior post, I discussed the more detailed guidance on the review in the PTE’s preamble (Best Interest #99). This article, though, is intended to be an overview of the Review and Self-Correction process. So, let’s turn to compliance failures discovered in the process of conducting the review. The PTE provides:

(e) Self-Correction. A non-exempt prohibited transaction will not occur due to a violation of the exemption’s conditions with respect to a transaction, provided:

(1) Either the violation did not result in investment losses to the Retirement Investor or the Financial Institution made the Retirement Investor whole for any resulting losses;

(2) The Financial Institution corrects the violation and notifies the Department of Labor of the violation and the correction via email to IIAWR@dol.gov within 30 days of correction;

(3) The correction occurs no later than 90 days after the Financial Institution learned of the violation or reasonably should have learned of the violation; and

(4) The Financial Institution notifies the person(s) responsible for conducting the retrospective review during the applicable review cycle and the violation and correction is specifically set forth in the written report of the retrospective review required under subsection II(d)(2).

In other words, if failures are found, and are corrected (and filed with the DOL), the failures will be treated as “non-exempt” prohibited transactions.

That leads to the question, what are these compliance failures? The PTE requires that the following “conditions” be satisfied. If, with regard to a particular recommended transaction,  any one of the conditions is not, the failure results in a prohibited transaction that would need to be corrected.

• Failure to satisfy the Impartial Conduct Standards:
  • The best interest standard of care
  • Receiving only reasonable compensation and satisfying the SEC’s best execution standard
  • Not making materially misleading statements that are relevant to the recommendation
• Failure to make the required disclosures prior to engaging in the recommended transaction:
  • Written acknowledgement that the financial institution and investment professional are fiduciaries under ERISA and the Code
  • Written description of the services to be provided and of the material conflicts of interest
  • Written description of the specific reasons why the recommendation is in the best interest of the retirement investor
• Failure to establish and enforce policies and procedures:
  • To ensure that the financial institution and investment professionals comply with the Impartial Conduct Standards
  • To mitigate conflicts to the extent that a reasonable person reviewing the policies and procedures would conclude that they do not create an incentive for the financial institution and investment professionals to place their interests ahead of the interest of the retirement investor
  • To document the specific reasons why the recommendation is in the best interest of the retirement investor.
• Failure to perform an annual retrospective review and prepare and sign the report of the review.

Each recommended transaction that is covered by the exemption must satisfy all of these conditions. While the (i) policies and procedures and (ii) the retrospective review requirements lie exclusively at the firm level (and once done, will apply across all of the recommended transactions), compliance with the Impartial Conduct Standards and the disclosure requirements will be primarily done by the “investment professionals” (as the DOL refers to advisors). And that is where most of the failures will probably be found.

Once found, failures must be corrected to avoid being treated as prohibited transactions. However, there is not a “one-size-fits-all” correction for the potential corrections. Each type of failure will need to be considered and corrected on its own. But that is for a future article.

Concluding Thoughts

The points that this post makes are (i) now it the time to start the annual retrospective review for covered recommendations in 2022, (ii) the review will undoubtedly uncover compliance failures with the conditions in the PTE, (iii) those failures should be corrected and reported to the DOL, and (iv) the review, failures and corrections should be included in the review’s report, which must be signed by a senior executive officer of the firm.