Overview of New DOL Retirement Security Rule
Overview of New Retirement Security Rule:
Expansion of Fiduciary Definition
We are closely monitoring the developments in the U.S. Department of Labor's (DOL) recent rulemaking efforts. Below, we provide a concise overview of the final rule along with compliance dates. Please note that the rule, consisting of 466 pages, was published just a week ago and our analysis is ongoing. Stay tuned to Lodestar for further guidance.
Key Developments in the Final Rule and PTE 2020-02:
Final Rule Released: The final rule was published in the Federal Register on April 25, 2024, and will phase into effect starting September 23, 2024, with full implementation by September 23, 2025.
Amendments to PTE 2020-02: Effective from September 23, 2024, with a one-year phase-in period, these amendments expand the scope of covered transactions and update conditions related to disclosure, recordkeeping, and eligibility.
Implications for Financial Institutions:
The rule primarily impacts broker-dealers, investment advisers, and banks. The amendments are relatively minor for entities already compliant with PTE 2020-02. This discussion focuses on changes affecting investment advisers under PTE 2020-02:
Extended Scope and Enhanced Protections: The amendments extend the range of transactions covered and is available to new entities like pooled plan providers and robo-advisers.
Enhanced Disclosure and Fiduciary Acknowledgment: Financial institutions must now provide a written acknowledgment of their fiduciary status under ERISA, along with disclosures about fees, service scopes, and conflicts of interest. The DOL provides a model disclosure to facilitate compliance.
Sample Disclosure from DOL: "We are fiduciaries under ERISA and the applicable code when making investment recommendations for your retirement account. Our compensation methods create conflicts of interest; however, we operate under a rule that obligates us to prioritize your best interests:
· Adhere to a professional standard of care;
· Prioritize your financial interests;
· Avoid misleading statements about conflicts, fees, and investments;
· Follow best-interest advice policies;
· Charge reasonable fees for our services;
· Disclose our conflicts of interest."
Revised Impartial Conduct Standards: Replacing the "best interest standard," the amendment introduces the "Care Obligation" and "Loyalty Obligation," aligning closely with the SEC's Regulation Best Interest. These obligations require that financial advice reflect diligence and prudence, prioritizing the retirement investor's interests above all.
Policy and Procedure Requirements: Institutions must develop robust policies to ensure compliance with the new standards, mitigating conflicts of interest and avoiding practices that could compromise their impartiality. These policies and procedures must be readily available to the DOL upon request.
Annual Retrospective Reviews and Record Keeping: Financial institutions are required to conduct annual reviews to detect, prevent, and ensure compliance with the exemption conditions and maintain records for six years post-transaction.
Disqualification Provisions Expanded:
Reflecting similar updates made to the "qualified professional asset managers" (QPAMs) exemption, the amendments to PTE 2020-02 also broaden the disqualification provisions. The amendments extend disqualification provisions to include convictions of certain affiliated entities and foreign convictions, imposing a 10-year disqualification period for relevant convictions.
Operational Adjustments:
Advisers are required to submit their compliance policies to the DOL within 30 days of a request.
Financial Institutions must adopt and prudently design policies to ensure adherence to the Impartial Conduct Standards and conduct an annual retrospective compliance review, signed by senior management.
Regulatory Enforcement and Compliance: The rule emphasizes the need for annual retrospective reviews and the correct reporting of non-exempt prohibited transactions. Financial Institutions must report such transactions to the Department of the Treasury, rectify them, and settle any resulting excise taxes. Non-compliance could result in losing eligibility to rely on PTE 2020-02 and PTE 84-24.
Conclusion:
As we continue to analyze the details of the DOL's final rule and the amendments to PTE 2020-02, it is essential for affected entities to prepare for the upcoming changes to ensure seamless compliance. We will provide further updates and guidance as more information becomes available and as the implementation date approaches.
Actionable Compliance Steps:
Update client statements for new fiduciary acknowledgment requirements.
Enhance annual retrospective reviews to incorporate new standards.
Revise internal policies to mitigate conflicts and ensure compliance with amended conditions.
Educate staff on the new requirements and standards of PTE 2020-02
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At altPILOT Lodestar, our goal is to make the seemingly opaque and obscure world of risk management more transparent and more easily accessible: in other words, to be your Lodestar through the choppy waters and dark nights of the investment advisory industry. To that end, we will continually monitor SEC Risk Alerts and Exam Priorities to bring you via our Lodestar Alerts timely and accessible explanations of some of the most significant shifts in the regulatory landscape.
