What brokers need to know about fixing PTE 2020-02 errors | Faegre Drinker Biddle & Reath LLP

Key points to remember

The DOL expanded its interpretation of fiduciary advice in the preamble to TEP 2020-02 and as a result many other broker-dealers and their registered representatives (investment professionals) are fiduciary for their recommendations to pension investors, including bearing recommendations. Therefore, they will need the protection provided by PTE 2020-02. The PTE contains a number of conditions and if these conditions are not met, a prohibited transaction will result.

The good news is that the PTE provides a self-correcting process. Unfortunately, some conditions in the self-correction process are difficult to interpret and further guidance from the DOL is required.

To avoid these challenges, brokers should implement good processes and documentation for meeting PTE requirements and closely supervise their investment professionals to ensure processes are followed.


As we have discussed in previous articles, DOL’s Prohibited Transaction Exemption (PTE) 2020-02 (Improving Investment Advice for Workers and Retirees) (the “PTE”) allows brokers and their registered representatives (investment professionals) from receiving conflicting information. compensation resulting from non-discretionary fiduciary investment advice to tax-qualified private sector pension plans governed by ERISA, participants in such plans and owners of IRAs (collectively, “Retirement Investors”). Further, in the preamble to the TEP, the DOL expanded its interpretation of fiduciary advice. Because of this expanded interpretation, many other brokers and their investment professionals are trustees for their recommendations to retirement investors – including rollover recommendations – and will therefore need the protection provided by the PTE.

The PTE contains a number of conditions and if these conditions are not met, the compensation the broker earns from the referral – for example, commissions or 12b-1 fees on IRA investment transactions, in the case of a rollover – is a prohibited transaction. Most of the PTE requirements came into effect on February 1, 2022 and some brokers are already discovering compliance issues due to not meeting all the PTE conditions. For example, we have seen the following types of PTE failures:

  • Failing to provide adequate and/or timely acknowledgment of fiduciary status under ERISA and the Tax Code.
  • Failing to recognize that the PTE is necessary to recommend a transfer from an existing IRA with another company to an IRA with the broker.
  • Not disclosing this plan to IRA rollover recommendations and IRA to IRA transfer recommendations are conflicts of interest.
  • Not disclosing the specific reasons why the IRA rollover or IRA-to-IRA transfer is in the best interest of the investor. (This condition came into effect on July 1, 2022).

The good news is that the PTE provides a self-correcting process.

PTE self-correction procedures:

Fortunately, if the self-correction process in the PTE is satisfied, the failure will not be treated as a prohibited transaction. The PTE self-correction process has the following four requirements:

  1. The failure did not result in investment losses for the retirement investor or, if losses resulted, the broker returned the retirement investor whole.

    This condition is difficult because the DOL has not provided guidance on the meaning of “investment loss”. On the one hand, the DOL is unlikely to expect the company to cover a loss resulting from normal market fluctuations, as long as the investment professional has carefully selected the investments in the rolling IRA. and that they were reasonably priced. On the other hand, it’s possible that “investment loss” could refer to the increased fees and costs that can cause the IRA to roll over. And, if so, it raises the question of whether the correction should include the continuing effect of higher spending that will continue year after year.

  2. Broker corrects violation and notifies DOL of violation and correction via email to [email protected] within 30 days of correction.

    This condition requires the breach to be corrected and the DOL has not provided specific details on how to correct failures to comply with the various terms of the PTE. Correcting a prohibited transaction generally requires the retired investor to return to the position they would have been in had the prohibited transaction not occurred. However, in a rollover context, this would mean rollover rolling – and since the plans do not accept rollover returns from former employees, this is unlikely to be what the DOL had in mind. Also, what if there are systemic failures? For example, suppose the company’s turnover disclosure form is deficient and does not contain a declaration of conflict of interest – – that a turnover recommendation is a conflict because of the compensation that will be earned from the job. Rolling IRA. Applying a reasonable interpretation, it is likely that the DOL would expect the remedy to be to provide conflict disclosure to all participants and/or IRA owners who have implemented the recommended rollovers and would like to be informed. of this failure. This then raises the question of the consequences of a retired investor who then opposes the rollover. The correction in this case is unclear and brokers should work with the ERISA attorney to determine the appropriate correction.

  3. The correction is made no later than 90 days after the broker becomes aware of the violation or reasonably should have become aware of it.

    To satisfy this condition, brokers should closely monitor and review procedures for rollover recommendations and other recommendations requiring PTE relief. This will allow the broker to discover the error and fix it in a timely manner.

  4. The broker-dealer 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.

    Dealers can meet this condition by ensuring that monitoring procedures identify the person responsible for carrying out the annual retrospective review (usually the chief compliance officer) and by training investment professionals and supervisors to report PTE failures and fixes to this person.


With these conditions in mind, brokers should review and modify their monitoring procedures, as needed, to reflect compliant processes and documentation for rollover recommendations and other recommendations requiring relief through the PTE. This should be combined with the training of their investment professionals and close supervision of the recommendations covered to ensure that processes are followed, and to identify and correct deficiencies in a timely manner as part of the self-correction process. of the PTE.

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