Retroactive Compliance Reviews

Art by Tim Bower

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 law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a nationally recognized expert in employee benefits law, is counsel in the firm’s financial services ERISA practice.