The New ERISA Exemption – What Financial Professionals Need to Know

The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), contains provisions that restrict fiduciaries to retirement plans from engaging in certain activities. These prohibited activities include, among other things, self-dealing, implementing principal transactions,[1] and receiving compensation from third parties in connection with any transactions involving an ERISA plan.



In December 2020, the Department of Labor (the “DOL”) adopted a new exemption under ERISA, which became effective February 2021 and specifically covers these three prohibitions (“PTE 2020-02”). This exemption can be relied upon by SEC and state registered investment advisers, broker-dealers, banks, insurance companies (“Financial Institutions”), and their employees, agents, and representatives (“Investment Professionals”), that are deemed investment advice fiduciaries,[2] so long as the exemption’s requirements are met, and they are not otherwise excluded from reliance.[3]

In this Risk Management Update, we will discuss the requirements under PTE 2020-02 and provide practical guidance and compliance steps that investment advice fiduciaries should consider in order to help ensure continued adherence with the exemption.


Exemption Requirements

There are five main components to PTE 2020-02, which are designed to safeguard against the conflicts of interest that apply to the prohibited activities covered by this exemption.

Importantly, investment advice fiduciaries must adhere to the safeguarding requirements, as applicable, in order to rely on PTE 2020-02. Below is a summary of each requirement.

 1. Impartial Conduct Standards

In summary, the Standards mandate that: (a) investment advice provided must be in the best interest[4] of the Retirement Investor;[5] (b) any direct or indirect compensation received by the investment advice fiduciary, its affiliates, and/or related entities does not exceed reasonable compensation, as such term is defined in ERISA section 408(b)(2) and IRS Code section 4975(d)(2); (c) the investment advice fiduciary seeks best execution of each transaction reasonably available under the circumstances; and (d) all statements made to Retirement Investors about recommended transactions and other relevant matters are not, at the time the statements are made, materially misleading.

 2. Disclosures to Retirement Investors

In the news release issued by the DOL’s Employee Benefits Security Administration on December 15, 2020,[6] the Acting Assistant Secretary of Labor stated the following:

“Under the exemption, investment professionals must plainly tell retirement investors that they are acting as fiduciaries and they must act in the retirement investors’ best interest. In this way, the exemption protects retirement investors by requiring investment professionals to lay down clear markers about their relationship and their conduct with retirement investors.”

Under PTE 2020-02, the following disclosures must be provided by investment advice fiduciaries to Retirement Investors[7]:

  •  Prior to engaging in any transaction covered under the exemption:
    • A written acknowledgment of fiduciary status; and
    • A written description of services to be provided and all applicable material conflicts of interest.
  • Prior to engaging in a recommended rollover:
    • Documentation showing the specific reasons for the rollover recommendation and which reflect that the rollover is in the Retirement Investor’s best interest.[8]
  1. Written Policies & Procedures

Financial Institutions deemed investment advice fiduciaries must create, maintain, and enforce customized written policies procedures that are reasonably designed to mitigate applicable conflicts of interest and ensure adherence to PTE 2020-02 by the Financial Institutions and their Investment Professionals.

  1. Compliance Review

Annually, Financial Institutions deemed investment advice fiduciaries are required to perform a retrospective review to assist with detecting and preventing violations and ensuring compliance with the requirements of PTE 2020-02. Each review must be documented in a written report.

  1. Written Certification

 A senior executive officer of the Financial Institution is required to review the annual report and certify in writing that: (i) the officer has reviewed the report, (ii) the firm has policies and procedures reasonable designed to achieve compliance with the PTE 2020-02, and (iii) the firm has a prudent process for updating the policies and procedures. The review, report, and certification must be completed within six months from the end of the period covered by the review and retained, along with all supporting documentation, for at least six years.[9]he Financial Institution will be required to retain the report, certification, and supporting data for at least six years, and to make these items, along with other records required under the exemption available to the Department within 10 business days of the request.


Compliance Guidance

Below are steps Financial Institutions should consider that will help to ensure compliance with the requirements of PTE 2020-02.

  1. Utilize a worksheet that will assist with determining and documenting that recommendations provided to Retirement Investors are in their best interest.
  2. Analyze all compensation received by the firm and its Investment Professionals and implement appropriate supervisory and mitigation controls geared toward addressing incentivizing conflicts.
  3. Confirm that best execution processes and reviews include transactions effected for Retirement Investors.
  4. Perform and document reviews of correspondence and other communications provided to Retirement Investors.
  5. Create an ERISA Disclosure Brochure that includes disclosures required under the exemption and Section 408(b)(2) and deliver to Retirement Investors.
  6. Calendar annual reviews to ensure performance within required period.
  7. Utilize compliance technology to capture documentation and maintain required books and records.
  8. Develop forensic and transactional testing protocols to evaluate the effectiveness of compliance controls and procedures applicable to PTE 2020-02.
  9. Provide extensive training and education to employees, supervisors, and Investment Professionals on the requirements of PTE 2020-02 and the firm’s applicable policies and procedures.
  10. Ensure that written policies and procedures address all applicable ERISA requirements and exemptions relied upon by the firm.[10]



The information provided in this Risk Management Update is only a high-level summary of certain areas of PTE 2020-02. Senior management should review the exemption in its entirety and confer with legal counsel and/or compliance consultants that are well versed in ERISA requirements to understand the full requirements and determine how they apply to your firm.


Author: Tina Mitchell, Managing Director, Consultation Services; Core Compliance & Legal Services (“Core Compliance”).  We work extensively with investment advisers, broker-dealers, investment companies, hedge funds, private equity firms, and banks on regulatory compliance issues.


This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.

[1] A principal transaction is the purchasing and selling of an investment with a plan and/or IRA when a fiduciary is acting on behalf of his/her own account(s).

[2] The term “investment advice fiduciaries” includes any financial institutions and investment professionals that meet the ERISA five-part test: (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that (4) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the plan or IRA.

[3] PTE 2020-02 does not apply: (i) to any ERISA plan where the investment advice fiduciary or any affiliate is the employer of the employees covered by the plan, or a named fiduciary or plan administrator with respect to the ERISA plan and was selected to provide advice by a fiduciary that is not independent of the investment advice fiduciary and its affiliates, (ii) to robo-adviser platforms, and (iii) when the Investment Professional is acting in a fiduciary capacity other than as an investment advice fiduciary within the meaning of the regulations at 29 CFR 2510.3-21(c)(1)(i) and (ii)(B) or 26 CFR 54.4975-9(c)(1)(i) and (ii)(B) setting forth the test for fiduciary investment advice.

[4] As defined in Section V(b) of PTE 2020-02, such advice reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, and does not place the financial or other interests of the Investment Professional, Financial Institution or any affiliate, related entity, or other party ahead of the interests of the Retirement Investor, or subordinate the Retirement Investor’s interests to their own.

[5] The exemption defines Retirement Investors as Plan participants and beneficiaries, IRA owners, and Plan and IRA fiduciaries. As defined in Section V(i) of the exemption, the term “Plan” means any employee benefit plan described in ERISA section 3(3) and any plan described in Code section 4975(e)(1)(A). In Section V(g), the term “Individual Retirement Account” or “IRA” is defined as any account or annuity described in Code section 4975(e)(1)(B) through (F), including an Archer medical savings account, a health savings account, and a Coverdell education savings account.

[6] See

[7] These disclosures are in addition to the ones required under ERISA Section 408(b)(2)

[8] PTE 2020-02 requires Financial Institutions to maintain such documentation for at least six years.

[9] The required records must be provided to the DOL within 10 business days of any request.

[10] For example, the DOL recently adopted amendments on fiduciary duties regarding proxy voting and shareholder rights that effect, among others, investment advisers (


Leave a Reply

Your email address will not be published. Required fields are marked *