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.
By “rollover” recommendation, we mean a recommendation made to a participant in a retirement plan to take a distribution of his or her account and roll it over to an IRA handled by the broker-dealer or RIA (which in this article we refer to as the “firms”). In this article, we look at the existing ERISA rules in light of the 5th Circuit’s decision vacating the Fiduciary Rule, and then review existing FINRA guidance on rollover recommendations. In Parts 2 and 3, we’ll discuss the SEC’s proposals for broker-dealers and RIAs and where that may take firms in the future, as well as how to comply with the rules when making a rollover recommendation.
In 2005, the DOL opined that a rollover recommendation is not fiduciary advice under ERISA. On the other hand, it said that if an advisor is already a fiduciary to a plan, a rollover recommendation is considered a fiduciary act, which subjects the advisor to the ERISA fiduciary and prohibited transaction rules. The DOL did an about-face when it issued its new Fiduciary Rule, saying that the recommendation was fiduciary advice, so that even if an advisor was not a plan fiduciary, he or she became a fiduciary for that recommendation. But since the Fiduciary Rule is now gone, the 2005 advisory opinion re-emerges as the controlling guidance.
This re-emergence means that firms need to assess whether they and their advisors are plan fiduciaries. RIA services to plans would usually satisfy the “five-part test” used to determine whether someone is giving ERISA fiduciary investment advice. Assuming the RIA is a fiduciary to the plan, this means that it and its advisors would also be fiduciaries under ERISA for rollover recommendations. Even if they are not fiduciaries for ERISA purposes, they would nonetheless be fiduciaries to participants in that plan.
Depending on the facts, broker-dealer services may or may not constitute fiduciary investment advice. Broker-dealers will need to carefully assess their advisors’ services to plans to determine whether the advisors and the broker-dealer are fiduciaries to the plans and therefore are fiduciaries for rollover recommendations to participants in that plan.
Even if the broker-dealer and its advisor are not fiduciaries under ERISA, they are still governed by FINRA’s rules, which are in FINRA Regulatory Notice 13-45. In that Notice, FINRA said that a rollover recommendation is inherently a recommendation about the purchase, sale or holding of securities, which triggers application of Rule 2111, the suitability rule. Regarding rollover recommendations, FINRA said:
A recommendation to roll over plan assets to an IRA rather than keeping assets in a previous employer’s plan or rolling over to a new employer’s plan should reflect consideration of various factors, the importance of which will depend on an investor’s individual needs and circumstances.
It then listed factors to be considered and compared, including differences in the plan and the proposed IRA regarding investment options, fees and expenses, services, penalty-free withdrawals, creditor protection and required minimum distribution requirements.
FINRA also provided what amounts to an admonishment about how an advisor should approach the recommendation:
If Rule 2111 is triggered, a registered representative must have a reasonable basis to believe that the recommendation is suitable for the customer, based on information about the options obtained through reasonable diligence, and taking into account factors such as tax implications, legal ramifications, and differences in services, fees and expenses between the retirement savings alternatives. [Emphasis added]
The factors to be considered, including those at the end of that quote, are similar to the approach taken by the DOL in its vacated Fiduciary Rule. Put another way, to the extent a firm modified its procedures and policies with a view to complying with the DOL rule for rollover recommendations, it may want to consider the requirements of 13-45 before reverting to its prior practices.
FINRA acknowledged in Notice 13-45 that some firms only permit advisors to provide educational information about rollovers (which is consistent with the DOL position). In those cases, FINRA said, firms should adopt measures reasonably designed to ensure that the firm and its advisors do not make recommendations. Those measures should include training, consideration of compensation arrangements that could cause an advisor to make a recommendation, and monitoring advisor communications to ensure that the prohibition against rollover recommendations is not compromised.
Where does this leave firms today? FINRA’s suitability rules apply to the recommendations, so firms need to follow the Notice 13-45 guidance. Firms also need to assess whether they are plan fiduciaries under the DOL’s five-part test. If they are, the recommendation is also subject to the ERISA fiduciary and prohibited transaction rules.
The bottom line is that firms need to carefully consider existing requirements in developing a compliance approach for recommending or educating participants about rollovers.