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Regulation and Compliance > Federal Regulation

Are You Ready for the DOL’s Next Fiduciary Deadline?

By Thomas D. Giachetti

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What You Need to Know

  • Investment advisors must fulfill the latest requirements of the Prohibited Transaction Exemption for rollovers no later than July 1.
  • Advisors must conduct a retrospective review of compliance with the Impartial Conduct Standards and file a written report.
  • The DOL expects advisors to use the review to find more effective ways to help ensure that advice complies with the standards.

The Labor Department’s fiduciary-rule requirement rollout continues with the fast-approaching July 1, 2023, filing date for an investment advisor’s initial retrospective review.

While we anticipate assisting many investment advisors throughout the country with their completion of this new requirement, it’s important to understand its purpose and components. For this reason, I asked my colleague Joseph Antonakakis to share his expertise in this area.

The retrospective review requirement of Prohibited Transaction Exemption 2020-02 (PTE) for rollovers is designed to assist in detecting and preventing violations of — and achieving compliance with — the Impartial Conduct Standards and the policies and procedures adopted for compliance with the PTE.

Compliance with the standards of the PTE is achieved by:

  • Providing investment advice that is in the retirement investor’s best interest,
  • Charging reasonable compensation,
  • Avoiding materially misleading statements about the recommended investment transaction and other relevant matters,
  • Seeking to obtain the best execution of the investment transaction reasonably available under the circumstances, as required by the federal securities laws; and
  • Self-correcting any violation within 90 days and furnishing notification to the DOL within 30 days of the correction.

Purpose of the Review

The DOL expects advisors to use the results of the review to find more effective ways to help ensure that investment professionals are providing investment advice in accordance with the Impartial Conduct Standards and to correct any deficiencies in existing policies and procedures.

Senior executive officers, such as the investment advisor’s chief compliance officer, should carefully review the report before making the required certifications so that they can make the certifications with confidence. This ensures that the investment advisor, through an appropriate executive officer, is fully accountable for the retrospective review.

What’s Covered

The retrospective review must assess whether the investment advisor follows the best interest standard of care, receives only reasonable compensation and is satisfying the SEC’s best execution standard.

In addition, advisors must not make materially misleading statements related to recommendations; they should make required disclosures prior to engaging in a recommended transaction, establish and enforce policies and procedures, and complete the retrospective review report.

Timing

The retrospective review, report and certification must be completed at least annually and no later than six months following the end of the period covered by the review. A review covering the calendar year 2022 must be completed by or before July 1, 2023.

The investment advisor must retain the report, certification and supporting data for six years and provide these documents to a DOL or Internal Revenue Service official within 10 business days of a request.

Written Report

The methodology and results of the retrospective review must be reduced to a written report. The written report must:

  • Describe the policies and procedures in place at the investment advisory that ensure compliance with the requirements of the Impartial Conduct Standards;
  • Explain violations of the investment advisor’s compliance policies and procedures during the review period, including a description of the issue, how the issue was detected and how the issue was remediated; and
  • Disclose whether any self-corrections were required, as discussed below, as well as how the policies and procedures were modified, if at all.

The written report should be provided to one of the investment advisor’s senior executive officers, who must then make certain certifications related to their review of the report. These certifications include:

  • The senior executive officer has reviewed the report of the retrospective review;
  • The financial institution has in place policies and procedures prudently designed to achieve compliance with the conditions of the exemption; and
  • 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 the exemption.

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice of Stark & Stark. A former investment banker and NASD registered representative, Giachetti’s legal practice is devoted to investment-related matters, including the representation of investment advisers, financial planners, broker-dealers, CPA firms and registered reps.

(Image: Shutterstock)

Thomas D. Giachetti

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