Fiduciary Rules for the Transfer of IRAs

When a financial advisor moves from one broker-dealer to another, both the firm and the advisor want his or her clients to come along.  When those clients have IRAs, any recommendations to the IRA investors are now subject to greater scrutiny.  This is because, under the DOL’s new fiduciary advice rule, a recommendation to move an IRA from another firm is a fiduciary recommendation.  And while this would ordinarily be a prohibited transaction under the Internal Revenue Code – because the broker-dealer and advisor will make money if the account is transferred but won’t if it isn’t – there is an exemption that permits the recommendation and any resulting compensation, if a number of conditions are satisfied.

As a word of caution, the new world of regulated fiduciary advice means that broker-dealers need to look at everyday transactions and the recommendations their advisors make in a new way.  And it requires that they engage in a new process.  This post describes what that  means.

The exemption referred to in the first paragraph, the Best Interest Contract Exemption or BICE, says that the payment of compensation resulting from recommending the transfer of the IRA is permissible if the broker-dealer and its advisor comply with three “Impartial Conduct Standards”.  These require that:

  • They act in the “best interest” of the client, which means that the transfer recommendation is both prudent and loyal to the investor;
  • The resulting compensation is reasonable for the services provided; and
  • The broker-dealer and the advisor make no materially misleading statements in the process.

So how do you act in the best interest of the client in this situation?  While there are no specific guidelines, it means that the broker-dealer and advisor need to do a comparison between the investments, services and expenses available in the current IRA (the one at the advisor’s old firm) versus those in the new IRA (i.e., at the new firm), taking into account the needs, objectives, risk tolerance and financial circumstances of the IRA owner.  The process also needs to consider any special circumstances that require consideration of additional information.

There may be other considerations that need to be taken into account, and the ones described above are not a complete list.  But the important point is to focus on the client’s needs and make sure the firm’s (and advisor’s) financial interests take a back seat.

One more essential element of the process:  the information gathered to do this analysis, plus the analysis itself, should be documented in the new firm’s files.  That information is evidence of compliance with the requirements of the BICE prohibited transaction exemption.  The burden of proving the requirements of the exemption were satisfied falls on the broker-dealer. As a result, the documentation should be retained in a “retrievable fashion” in case of a claim that the requirements were not met.

The views expressed in this article are the views of the authors, and do not necessarily reflect the views of Drinker Biddle & Reath.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

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