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What is the Principal Transaction Class Exemption (PTE)?

Principal Transaction Class Exemption

Application of Exemption

The Principal Transaction Class Exemption (PTE) allows investment advice fiduciaries to engage in some transactions that would otherwise be prohibited.

Transactions covered by the PTE are those

  • with a plan, participant or beneficiary account, and IRA AND
  • that are purchases or sales of certain investments (debt securities or other investments) out of the inventory of the financial institution.

Such transactions are either a “Principal Transaction” or “Riskless Principal Transaction.”

  • A “principal transaction” is a transaction in which a financial advisor or financial institution is purchasing from, or selling to, the retirement plan, participant, or beneficiary account, or IRA on behalf of the account of the financial institution, or the account of any person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the financial institution. (A principal transaction does not include a “riskless principal transaction.”)
  • A “riskless principal transaction” is a transaction in which a financial institution, after having received an order from a retirement investor to buy or sell a principal traded asset, purchases or sells the asset for the financial institution’s own account to offset the contemporaneous transaction with the retirement investor.

An otherwise prohibited principal transaction will be permitted if:

  • the financial advisor gives advice regarding the transactions that is in its customers’ best interest AND
  • the financial institution implements basic protections against the risk of conflicts of interest.

Recordkeeping:

The recordkeeping requirements detailed in the summary of the BIC Exemption are also applicable under the PTE.

Principal Transaction Class Exemption

Limitations on Exemption

Purchase of a Debt Security:

When a retirement plan, participant or beneficiary account, or IRA purchases a debt security, the following conditions apply:

  • the debt security may not have been issued by the financial institution or any affiliate AND
  • the debt security may not have been purchased by the retirement plan, participant or beneficiary, or IRA in an underwriting or underwriting syndicate in which the financial institution is an underwriter or member AND
  • the financial advisor must determine that the debt security possesses no greater than a moderate credit risk and is sufficiently liquid to enable sale at or near its carrying value within a reasonably short period of time.

Limited Scope of Exemption:

The exemption will not apply if

  • the financial advisor has or exercises any discretionary authority or control with respect to the management or disposition of the assets of the retirement plan, participant or beneficiary account, or IRA OR
  • the financial advisor has any discretionary authority or discretionary responsibility in the administration of the retirement plan, participant or beneficiary account, or IRA OR
  • in the case of an ERISA plan, the financial institution (or any affiliate) is the employer of employees covered by the plan OR
  • the financial advisor or financial institution is a named fiduciary or plan administrator of the retirement plan and was selected to provide investment advice for the retirement plan by a fiduciary who is not independent.

Principal Transaction Class Exemption

Interim Rules (6/9/2017 - 12/31/2017) for Application of Exemption

While the Principal Transactions Class Exemption will apply to transactions occurring on or after June 9, 2017, full compliance will not be required until January 1, 2018. Between June 9, 2017, and January 1, 2018 (the “transition period”), full relief under the exemption will be available for financial institutions and advisors if they adhere to impartial conduct standards requiring them to:

  • give advice that is in the retirement investor’s best interest (i.e., prudent advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor, without regard to financial or other interests of the financial advisor, financial institution or any affiliates or other parties) AND
  • seek to obtain the best execution reasonably available under the circumstances with respect to the transaction AND
  • make no misleading statements about investment transactions, compensation, and conflicts of interest.

The lesser standard of the transition period will not apply in the following situations:

  • if the financial advisor has or exercises discretionary authority or control with respect to the management of the retirement plan or IRA involved in the transaction, or exercises any discretionary authority or control respecting management of disposition of the assets OR
  • if the financial advisor has any discretionary authority or responsibility in the administration of the retirement plan or IRA OR
  • for ERISA plans only, if the financial advisor, financial institution, or any affiliate is the employer of employees covered by the plan or is a named fiduciary or administrator of the retirement plan that was selected to provide advice by a fiduciary who is not independent or IRA.

 

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