The Department of Labor (“DOL”) rule requirement continues with the fast-approaching filing date for an investment adviser’s initial Retrospective Review. While we anticipate assisting many investment advisers with their completion of this new requirement, it is important to understand its purpose and components. For this reason, I asked our colleague, Joseph Antonakakis, to share his expertise.
The Retrospective Review (the “Review”) requirement of Prohibited Transaction Exemption 2020-02 (the “PTE”) 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 thirty days of the correction.
Purpose of the Review
The DOL expects advisers 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 adviser’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 adviser, through an appropriate executive officer, is fully accountable for the retrospective review.
Activities and Transactions Covered
Advisers’ recommended transactions that must be reviewed under the Retrospective Review include ensuring the investment adviser follows the best interest standard of care, receives only reasonable compensation and satisfying the SEC’s best execution standard, not making materially misleading statements related to recommendations, making required disclosures prior to engaging in a recommended transaction, establishing and enforcing policies and procedures, and completing 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 calendar year 2022 must be completed by or before July 1, 2023. The investment adviser 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 adviser which ensure compliance with the requirements of the Impartial Conduct Standards, violations of the investment adviser’s compliance policies and procedures during the review period;
- Describe violations of the investment adviser’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;
- Whether any self-corrections were required, as discussed further below; and
- How the policies and procedures were modified, if at all.
The written report should be provided to one of the investment adviser’s Senior Executive Officers, who must then make certain certifications related to their review of the report, including:
- The Senior Executive Officer has reviewed the report of the retrospective review;
- The Financial Institution has in place policies & 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.
Self-Correction and Reporting
Violations of the PTE’s conditions can be self-corrected when conducting the retrospective review.
Section II(e) of the PTE contains a self-correction procedure for investment advisers to correct certain violations. Investment advisers can correct violations of the exemption within 90 days after the investment adviser learns, or reasonably should have learned, of the violation. If the violation did not result in investment losses to the retirement investor or if the investment adviser made the retirement investor whole for any resulting losses, the investment adviser must correct the violation and notify the Department of Labor at IIAWR@dol.gov within 30 days of correction. The investment adviser must notify the persons responsible for conducting the retrospective review of the violation and correction, and the violation and correction must be specifically set forth in the written report of the retrospective review.
The Department believes that the self-correction provision will provide Financial Institutions with an additional incentive to take the retrospective review process seriously, timely identify and correct violations, and use the process to correct deficiencies in their policies and procedures, so as to avoid potential future penalties and lawsuits.
Because we anticipate a substantial demand for our assistance with this new requirement, please advise us, via responsive email to tdg@stark-stark.com, if you would like our assistance. We will confirm receipt of your request, and you will be included on our Retrospective Review list. Thereafter, we will commence assisting investment advisers with their initial Retrospective Review in April (subsequent to the pending 3/31/23 annual ADV amendment deadline).
