Recommending Rollovers in the Evolving Regulatory Environment (Part 3)

In Parts 1 and 2 of this post, we talked about the current and proposed rules applicable to rollover recommendations by broker-dealers and RIAs. Part 1 discussed the DOL and FINRA rules that apply now. In Part 2, we explained the SEC proposals. In this post, we talk about how to make a compliant rollover recommendation, regardless of which set of rules applies.

(“Rollover recommendation” refers to advice to a retirement plan participant to take a distribution of his or her account and roll it over to an IRA that is being advised by the broker-dealer or RIA.)

General Standards

Before discussing the factors an advisor must consider, let’s review the general standards for making the recommendation:

  • The ERISA standard is the prudent process. The advisor must use “care, skill, prudence and diligence” and engage in a thorough investigation, which means gathering relevant information and evaluating that information in light of the needs and circumstances of the participant. In other words, the SEC’s proposals and the DOL’s vacated rule are remarkably similar on rollover recommendations, though the SEC’s proposal applies to all recommendations and the DOL’s rule would only have applied in the case of plans subject to ERISA.
  • The SEC’s Reg BI imposes similar requirements and uses similar wording. It refers to FINRA Regulatory Notice 13-45, which, like the ERISA requirement, says an advisor must obtain information about important factors (see below) and assess it in light of the investor profile. In addition to making sure the recommendation is “suitable,” Reg BI and the SEC’s RIA interpretation say it must be in the “best interest” of the participant. It then goes on to say that the advisor and his firm owe the participant a duty of loyalty, i.e., their interests cannot supersede those of the participant.

Stated simply, regardless of which rule is being applied, to satisfy the best interest and loyalty standards, an advisor (of a broker-dealer or an RIA) must use and document a process of gathering and carefully and professionally considering the relevant information.

Relevant Factors

What are the relevant factors? We think the two best sources are Regulatory Notice 13-45 and the DOL’s Best Interest Contract Exemption (BICE). Notice 13-45 is especially relevant since the SEC refers to it in Reg BI (and elsewhere). In essence, FINRA and the DOL said that advisors must consider, among other factors, the following:

  • the investments, services and expenses in the plan;
  • the investments, services and expenses for the proposed rollover IRA;
  • information about the participant, e.g., needs, financial objectives and risk tolerance;
  • though not required, other factors, such as participant preferences, outside assets, other family investments, and so on.

Why are we suggesting that advisors look at BICE? After all, it was vacated by the Fifth Circuit in June. But we think it reflects the DOL’s current thinking and is helpful guidance in trying to apply a “best interest” standard. Further, the DOL might use this list in enforcement actions against advisors who are plan fiduciaries making rollover recommendations. Also, FINRA and the SEC may defer to the DOL’s thinking in this area.

Keep in mind, though, the alternative we mentioned in Part 1…to provide participants with education about their options and not make a recommendation that triggers the best interest requirements.


In making rollover recommendations, good risk management suggests that broker-dealers and RIAS should develop policies, procedures and supervisory practices for gathering and considering the relevant information mentioned earlier: information about the plan investments, services and costs; and do a comparison with the same information in the proposed IRA, taking into account the investment profile of the participant.

Third Circuit Affirms Right to FINRA Arbitration, Widens Circuit Split

The U.S. Court of Appeals for the Third Circuit recently ruled that a broker cannot avoid FINRA arbitration with a customer through contractual forum selection clause that fails to specifically mention arbitration (Reading Health v. JP Morgan, No. 16-4234 (3d Cir. Aug. 7, 2018)). The court’s opinion denying the company’s appeal widens an existing circuit split on the issue of contractual forum selection clauses superseding FINRA’s mandatory arbitration rules.

Under FINRA Rules 12200 and 13200, disputes arising between a FINRA member and its associated persons or customers must be arbitrated through the FINRA arbitration process. In the Third Circuit case, the customer had filed a statement of claim with FINRA in relation to various auction rate securities (ARS) offerings the company had underwritten. The broker refused to arbitrate, and the customer filed in the Eastern District of Pennsylvania seeking to compel arbitration.  The customer won at the district court level, and the broker appealed based on a forum selection clause in its broker-dealer agreements that stated:
Continue reading “Third Circuit Affirms Right to FINRA Arbitration, Widens Circuit Split”

Drinker Biddle Launches Best Interest Compliance Team

As discussed regularly on this blog, the financial industry has seen a stream of rules and regulations in recent years that relate to the standard of care and management of conflicts for broker-dealers, investment advisers, insurance agents and companies.

The need for experienced counsel to help navigate the evolving and overlapping federal and state “best interest” obligations has increased. It’s the reason we’re excited to announce the launch of our Best Interest Compliance Team.

This interdisciplinary group of more than 20 lawyers consists of attorneys with experience across Investment Management, ERISA, SEC & Regulatory Enforcement Defense, Litigation/FINRA Arbitration, and Insurance Regulatory and Transactional practice areas.

The Best Interest Compliance Team will help clients make decisions about questions such as:

  • What does the SEC’s proposed Regulation Best Interest mean?
  • How does the SEC’s RIA interpretive guidance impact the standards currently applied to RIAs?
  • What is the effect of the court order vacating the DOL’s Fiduciary Rule and what already-implemented changes will continue under the SEC proposals for RIAs and broker-dealers?
  • How should written supervisory procedures be revised in light of these changes and proposals?
  • What measures should be taken to show good-faith compliance with the DOL’s non-enforcement policy?
  • Where should broker-dealers/RIAs/insurance companies go from here?
  • How should insurance agents deal with conflicting state regulatory schemes?

To learn more about the new Best Interest Compliance Team, read our press release or visit our team page on the Drinker Biddle website.

Recommending Rollovers in the Evolving Regulatory Environment (Part 2)

In our first post on this topic, we discussed the existing rules that apply to rollover recommendations by broker-dealers and RIAs. This discussion included the ERISA guidance that remains after the 5th Circuit’s decision vacating the Fiduciary Rule, as well as FINRA’s Regulatory Notice 13-45. In this post, we focus on the SEC’s best interest proposals for broker-dealers and RIAs and where that may take firms in the future. In our next, and final, post in this series, we’ll talk about how to make a compliant rollover recommendation.

(As a reminder, by “rollover” recommendation, we mean a recommendation to a retirement plan participant to take a distribution of his or her account and roll it over to an IRA being advised by the broker-dealer or RIA.)
Continue reading “Recommending Rollovers in the Evolving Regulatory Environment (Part 2)”

FINRA Arbitrations — A Comprehensive Guide for 2018 and Beyond

Florham Park partner Tracey Salmon-Smith will participate in The Knowledge Group’s live webcast “FINRA Arbitrations: A Comprehensive Guide for 2018 and Beyond” on Friday, September 7, 2018. This is a must-attend event for attorneys practicing before FINRA and anyone interested in understanding the significant issues relating to FINRA Arbitrations.

In December 2017, the FINRA issued a proposal that will revamp and strengthen expungement rules. Proposed changes include adjustments to the timeframe of filing expungement requests and the mandated unanimous consent of a FINRA arbitration panel to grant expungement. Brokers, however, are opposing to the proposed changes.

During the webcast, Tracey and a panel of key thought leaders and practitioners will offer a discussion of the fundamentals and updates regarding these proposed changes as well as other developments concerning significant issues surrounding FINRA Arbitrations. This live webcast aims to help you to avoid common pitfalls and risk issues in the evolving climate of FINRA forum.

Click here to register for the webcast.

Bye-Bye Bureaucracy, Hello Enforcement: FINRA Shakes Up the Structure of its Department of Enforcement

It was once said that “bureaucracy defends the status quo long past the time when the quo has lost its status.” FINRA, apparently a proponent of this idea, recently completed an overhaul of its Department of Enforcement’s structure in an attempt to create a “unified enforcement function.” Specifically, Susan Schroeder, FINRA’s head of enforcement, will head a single enforcement team charged with making decisions on investigations and penalties.

Prior to this consolidation, enforcement was split into two units. One was tasked with handling disciplinary matters concerning trading, and a second unit handled cases referred from FINRA’s other divisions, such as the Office of Fraud Detection.

The ultimate goal of this consolidation is “to facilitate more consistent decision-making and outcomes,” as well as “to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions.”  Additionally, independent commentators believe that FINRA’s new enforcement structure might make investigations shorter and increase transparency.

To savvy observers this consolidation will not come as a surprise. It is the result of FINRA 360, “FINRA’s ongoing comprehensive and improvement initiative” announced July 2017.  Consolidation of enforcement functions was listed, among others, as a way to make FINRA a “more effective, efficient regulator.”  Other FINRA 360 priorities include: Reporting on FINRA examination findings, reviewing engagement initiatives, and retrospective rule review.

It is unclear whether FINRA’s consolidation will achieve its goals. FINRA’s efforts, however, serve as a welcome sign to firms and commentators, as FINRA appears genuinely interested in improving its overall efficacy and efficiency.

Recommending Rollovers in the Evolving Regulatory Environment (Part 1)

With recent developments in the regulatory landscape – the demise of the DOL Fiduciary Rule, the SEC’s proposed Regulation Best Interest (Reg BI) and RIA fiduciary interpretation, and the existing FINRA guidance on rollovers – it’s important for firms to understand the rules for rollover recommendations. This article discusses the rules as they apply to both broker-dealers and RIAs. While there are similarities in the application, there are also material differences.   Continue reading “Recommending Rollovers in the Evolving Regulatory Environment (Part 1)”

FINRA Regulatory Notice Encourages Member Firms to Voluntarily Provide Information on Their Digital Asset Activities

FINRA recently issued a regulatory notice encouraging member firms to provide notification if either the firms or their associated persons or affiliates were engaging in, or planned to engage in, any activities related to digital assets such as cryptocurrencies and other virtual coins.

Citing the rapid market growth, the increasing interest from retail investors, and investor protection concerns, FINRA stated it has a keen interest in remaining abreast of the extent of member involvement in digital assets. Continue reading “FINRA Regulatory Notice Encourages Member Firms to Voluntarily Provide Information on Their Digital Asset Activities”

Make Senior Investing Safe Again? President Trump Signs Into Law the Senior Safe Act in an Attempt to Curb Financial Abuse of Seniors

On May 24, 2018, President Trump signed into law the Senior Safe Act,  which is aimed at curbing elder financial abuse. The Senior Safe Act is the latest effort to protect senior investors, as both FINRA and the SEC included protecting senior investors among their 2018 priorities. This blog has previously covered, at length, the SEC and FINRA 2018 exam priorities. Elder protection was also one of the SEC’s 2017 priorities and has been a FINRA priority since 2016.

Continue reading “Make Senior Investing Safe Again? President Trump Signs Into Law the Senior Safe Act in an Attempt to Curb Financial Abuse of Seniors”