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Fiduciary Status for the Unwary

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.)

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FINRA’S First Ever Public Release of Exam Findings: Top 6 Observations for Improving Compliance

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:

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The Delay of the Fiduciary Exemptions: Now Is Not the Time to Relax (Part 2 of 2)

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.

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The Delay of the Fiduciary Exemptions: Now Is Not the Time to Relax (Part 1 of 2)

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.

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Householding Accounts – Avoiding a Prohibited Transaction

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.

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