Last month the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued its “2019 Examination Priorities.” The release of OCIE’s 2019 Priorities this year was earlier than in years past. In retrospect, the date of issuance being the last day before the vast majority of the SEC staff was furloughed may just be coincidental, but the federal government shutdown allowed the industry more time to study OCIE’s 2019 Priorities for compliance planning for the upcoming year. Another impact of the shutdown and furloughs in an area directly related to OCIE’s first priority is that the SEC’s efforts and the timing of the finalization of the Reg BI proposals have very likely been slowed as well. The recent ending of the SEC furloughs and OCIE’s continuing prioritization of retail and retirement regulatory issues presents us with an opportune time to re-visit these important topics.
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If you thought that avoiding fiduciary status would be a slam-dunk after the “new” DOL fiduciary advice rule was vacated, think again. The DOL’s old fiduciary regulation is back and it casts an unexpectedly wide net.
Let’s start with the background. The reinstated fiduciary definition says that a broker-dealer and its advisor (a “broker”) are fiduciaries to a plan if a functional five-part test is satisfied: (1) the broker provides advice about investments for a fee or other compensation, (2) on a regular basis, (3) under a mutual understanding, (4) that the advice will form a primary basis for the plan’s decisions, and (5) that the advice is individualized based upon the plan’s particular needs. For this purpose, a “plan” includes not only an ERISA plan, but also an IRA. (In the context of IRAs, being a fiduciary under the five-part test does not itself implicate a standard of care, but does apply to the applicability of certain prohibited transactions.)
In a previous post, we discussed why broker-dealers and their representatives will likely still be fiduciaries to ERISA plans and IRA investors in many cases despite the DOL Fiduciary Rule’s impending death (we say “impending” because, while the Fifth Circuit’s ruling in mid-March vacates the Fiduciary Rule in its entirety, the court’s official order implementing this decision has yet to be issued). To review, this is because broker-dealers and their representatives often satisfy all the prongs of the soon-to-be reinstated 1975 fiduciary regulation’s “Five-Part Test” defining when investment recommendations rise to the level of “fiduciary” advice. Previous industry assumptions that brokers and other “sellers” of investments generally were not fiduciaries under the 1975 regulation should no longer be relied upon. In this post, we’ll examine how the Fiduciary Rule’s impending demise will affect prohibited transaction and compensation issues for broker-dealers in light of their likely continuing status as fiduciaries. Continue reading “Why Fiduciary Status Still Matters in a Post-Fiduciary Rule World: A Look at Prohibited Transactions And Compensation”
The “old” rules will again prevail—but the old rules will not be applied in the old ways, and this will have some significant impacts on broker-dealers.
As the DOL has not asked for a rehearing of the Fifth Circuit’s decision vacating the Fiduciary Rule, or yet sought to appeal the decision, it is widely anticipated that the March 15 ruling will soon take effect, restoring the DOL’s 1975 regulation defining fiduciary investment advice to plan and IRA investors (we say “widely anticipated” because, while the official mandate vacating the Fiduciary Rule is expected soon, it has been delayed while the court considers efforts from certain states and other third parties to intervene in the case). While the SEC has proposed new regulations for broker-dealers, and while we expect the DOL to propose new prohibited transaction exemptions or regulations that will coordinate with the SEC’s actions, it will be at least a year before these initiatives could begin to apply. Continue reading “Old Standard, New Day: The Death of the Fiduciary Rule Doesn’t Mean That Broker-Dealers Won’t be Fiduciaries”
Should you say goodbye to the Fiduciary Rule? Maybe, but not just yet. The DOL has until the end of April to decide whether to let the 5th Circuit decision vacating the Fiduciary Rule stand or try to get it over-turned. If they do nothing, the ruling becomes effective May 7, and bye-bye Fiduciary Rule – the regulation re-defining fiduciary investment advice for plans and IRAs and the related prohibited transaction exemptions.
Many pundits say this is what will happen. But it’s possible that the DOL will either ask the court to reverse itself – this would mean the 15 judge panel agreeing to re-hear and re-decide the case – or try to get the Supreme Court (SCOTUS) to accept an appeal. SCOTUS doesn’t have to do that, so those who think the DOL won’t let this go are betting on the re-hearing request. While requests for rehearing are rarely granted, in this case there might be a better chance. The decision vacating the Fiduciary Rule was a split decision, with Chief Judge Carl E. Stewart dissenting in favor of the Rule.
Most of us want to help family members – especially with issues in our realm of experience. But helping family members with their IRAs creates a problem under the “prohibited transaction” rules of the Internal Revenue Code (the “Code”). (Similar issues arise in connection with retirement plan accounts under the ERISA rules, but as we discuss later, the consequences aren’t quite as severe. Thus, our focus in this article is on IRAs.)
In our experience, this problem is not well-known and will come as an unpleasant surprise to many. To help you make sense of this, we are getting a little deeper into the legal weeds than we usually do.
As part of the Financial Industry Regulatory Authority’s (FINRA) efforts to protect investors, FINRA regularly conducts examinations of its broker-dealer members. Despite requests to release the reports to assist other FINRA members in improving their compliance with securities rules and regulations, FINRA has traditionally kept the reports private. That all changed this month.
On December 6, FINRA released a Summary Report of several observations from recent examinations. FINRA selected key issues based on their “potential impact on investors and markets or the frequency with which they occur.” The Summary Report will help FINRA members address potential areas of concern and improve their compliance and supervisory programs prior to their own examinations.
The Summary Report provides observations in 11 exam areas, and the notable ones include:
This is Part 2 of our post on important issues for broker-dealers during the extended transition period for the fiduciary exemptions. In Part 1, we discussed the need to develop written supervisory procedures under the Best Interest Contract Exemption (BICE) and the importance of engaging in – and being able to demonstrate – diligent and good faith efforts to comply with the exemptions.
Two other important issues are how to demonstrate compliance with the transition exemptions and the protections that are not afforded by the non-enforcement policy.
Some broker-dealers may be tempted to view the DOL’s extension of the transition period for the fiduciary exemption to July 1, 2019, and the extension of the DOL and IRS non-enforcement policies, as an opportunity to relax and take a break from compliance issues for the next 18 months. Unfortunately, that could turn out to be a risky decision.
We are concerned that firms may not be paying sufficient attention to some of the most critical transition issues, including adoption of policies and procedures to ensure compliance with the Impartial Conduct Standards and taking affirmative steps to ensure diligent, good faith compliance with the rules.
Householding of brokerage accounts is a common practice. Clients like it because they can get reduced fees by aggregating all of their accounts. Broker-dealers like it because they get more assets to manage. But when retirement accounts are involved, broker-dealers need to be mindful of special rules that can adversely affect their clients…because unhappy clients don’t tend to remain clients for long.
The problem occurs under the prohibited transaction rules of ERISA and the Internal Revenue Code. They say that a fiduciary (i.e., the person in control of the account – the investor) can’t use retirement assets to obtain a personal benefit. With householding, the client gets a personal benefit when the combined value of both his or her retirement and personal accounts hits a breakpoint that reduces the fee on the personal accounts. In other words, the investor gets a personal benefit from the use of retirement assets.