Tip for Updating Your Compliance Program: Prohibited Transaction Exemption


Jaqueline Hummel

Publish Date



  • Compliance

As we reflect back on Form ADV season, we are reminded that compliance officers face the thankless task each year of reviewing their policies and procedures to determine their adequacy and effectiveness, as required by Advisers Act Rule 206(4)-7. This review entails updating the firm's compliance program to reflect changes to relevant regulations and new regulatory guidance, and confirming the program is appropriately followed by the firm.  

We’ve compiled a series of tips to help you focus on the U.S. Securities and Exchange Commission (SEC) focus areas for 2023. You can read our previous tips here:  

Tip #8 – Perform Retrospective Review to Comply with Prohibited Transaction Exemption 2020-02

Many retail investment advisers have already done the heavy lifting required to comply with the Department of Labor’s (DOL’s)  Prohibited Transaction Exemption 2020-02 (PTE 2020-02), which went into effect (mostly) on February 1, 2020. This exemption, titled Improving Investment Advice for Workers & Retirees, allows investment advisers and broker-dealers to receive otherwise prohibited compensation, including commissions, 12b-1 fees, revenue sharing, and mark-ups and mark-downs in certain principal transactions. At the same time, however, the DOL expanded the definition of fiduciary advice under ERISA to include recommendations about rollovers and IRA investments. Consequently, financial institutions and investment professionals who make rollover recommendations may be engaging in prohibited transactions if the adviser receives ongoing payments for this advice, unless they can comply with PTE 2020-02. The compliance requirements for the exemption are discussed further in this article. They include following impartial conduct standards, providing required disclosures to investors, implementing certain policies and procedures, and conducting an annual retrospective review.

This last condition comes into play in 2023. The review must cover the prior 12-month period and be completed within six months. This means that the initial review should cover the period from February 1, 2022, to January 31, 2023, and be completed by July 30, 2023. This review is essential since a firm cannot rely on the exemption without it, and consequences can be significant, including penalties and potentially being banned from relying on the exemption for ten years.  

The goal of this review is to help firms detect and prevent violations of – and achieve compliance with – the Impartial Conduct Standards. The methodology for conducting the review and the results must be included in a written report provided to a Senior Executive Officer, defined as the Chief Executive Officer, President, Chief Financial Officer, or one of the three most senior officers of the firm. The Senior Executive Officer is also required to provide a written certification stating that:

  • They have reviewed the report.
  • The firm has policies and procedures “prudently designed” to achieve compliance with the exemption.
  • The firm has 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 are reasonably designed to ensure continuing compliance with the conditions of this exemption.”

The DOL noted in the preamble to the exemption that “if the officer does not have the experience or expertise to determine whether to make the certification, he or she would be expected to consult with a knowledgeable compliance professional to be able to do so.”

What happens when this review uncovers transactions that did not meet the conditions of the exemption? First, firms should follow the self-correction requirements discussed in Section II(e) of the exemption. If the self-correction process is satisfied, the transaction will not be considered "prohibited" by the DOL. The process has four requirements:

  1. The failure did not result in involvement losses to the retirement investor, or if losses did result, the firm made the investor whole for the loss.
  2. The firm corrects the violation and notifies the DOL via email at IIAWR@dol.gov within 30 days of correction.  
  3. The correction occurs no later than 90 days after the firm learned, or reasonably should have learned, about the violation.
  4. The firm notifies the person responsible for conducting the retrospective review during the applicable review cycle and includes the correction in the written report of the retrospective review.

Our guidance

  • Begin monitoring how the firm and its advisers are meeting the conditions of the exemption. The monitoring results can form the basis for the review. In the preamble to PTE 2020-02, the DOL indicated that the review should involve sampling transactions to determine compliance. Be thoughtful in selecting samples, considering that the DOL wants the review to be “aimed at detecting non-compliance across a wide range of transaction types and sizes, large and small, identifying deficiencies in the policies and procedures, and rectifying those deficiencies.” Consider using both risk-based and random sampling of transactions and recommendations.
  • Maintain copies of the data (including test samples) used for conducting the annual retrospective review for six years.
  • Expect to find errors and correct them. The DOL allows firms to correct compliance issues uncovered during the review.   

How we help

The compliance environment has never been more complex or demanding. Regulators expect absolute compliance and mitigation of your firm’s risks. You must meet these expectations and demands while putting client interests ahead of your own. These pressures undoubtedly put a strain on your time and resources. We can help you to navigate the evolving regulatory landscape while considering the complexity of your firm’s unique compliance requirements.  

ACA Signature is a scalable solution curated to suit your firm’s unique compliance needs. With ACA Signature, you can choose the combination of compliance advisory services,  innovative technology and managed services that is right for your firm. ACA Signature puts you in complete control of your compliance program. 

To learn more about ACA Signature, contact us below. 

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Listen to our 2023 Regulatory Outlook webcast on demand

We recently hosted a webcast to review the regulatory changes that will likely have implications on compliance programs in 2023 and provide recommendations to prepare for these changes. Our experts discussed rule proposals and adoption, examination and enforcement trends, and regulatory guidance. Watch our webcast for more insights to help you prepare your compliance program for this year’s focus areas.

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