The Department of Labor (DOL) and the Securities and Exchange Commission (SEC) are focusing on rollover recommendations and their impact on plan participants. The DOL has historically taken the position that a recommendation by a fiduciary advisor is subject to the ERISA prudent man rule and the duty of loyalty (known in combination as a best interest standard), and has recently expanded the definition of who is a fiduciary advisor. The SEC says that rollover recommendations by investment advisers and broker-dealers are subject to its best interest requirements. This article discusses the recent DOL guidance and the SEC’s Regulation Best Interest (Reg BI).
In both documents, the DOL and the SEC have expressed opinions about documentation for those recommendations. The DOL makes documentation an explicit requirement of its proposed prohibited transaction exemption for fiduciary investment advice. The SEC encourages documentation in the preamble to Reg BI. Neither mandates the information that needs to be reviewed and documented, but both provide lists of relevant data in the preambles to their guidance. In this post, we discuss the requirement and provide a chart of the information that should be considered.
The DOL Requirement
The DOL’s proposed fiduciary advice prohibited transaction exemption has an explicit documentation requirement for rollover recommendations. The proposed exemption requires that:
While the factors to be documented are not addressed in the proposed exemption, the DOL discusses the issue in the preamble. It states that
The DOL then lists factors that should be considered, as reflected in the chart provided later in this post. The DOL also discusses the efforts a fiduciary advisor should expend to obtain the necessary information:
Finally, the DOL addresses what happens if the information cannot be obtained, as shown in the chart.
The SEC Requirement
In the preamble to Reg BI, which applies to broker-dealers, the SEC says the following (in text preceding footnote 415):
Unlike the DOL, the SEC merely “encourages” broker-dealers to maintain records of the basis for a rollover recommendation rather than requiring it. The purpose of such records, the SEC says, is so that the broker-dealer can show later on, presumably during an examination, that it was acting in the customer’s best interest in making the recommendation.
In the adopting release for Reg BI, the SEC lists various factors that a broker-dealer should consider. These factors are listed in the chart below.
While Reg BI has a detailed discussion of the need to keep records for rollover recommendations, the SEC’s Interpretation Regarding the Standard of Conduct for Investment Advisers (the RIA Interpretation) does not address the need to develop and maintain documentation. That said, it is important to note that RIAs are held to a fiduciary standard that is at least arguably higher than the broker-dealer best interest standard. In light of this, it is a fair assumption that the SEC would not hold RIAs to a lower standard than that expected of broker-dealers. That view is bolstered by a public statement issued by SEC Chairman Clayton in June 2020, where he said:
Chairman Clayton is in essence applying the same standards and, presumably, the same regulatory requirements to both broker-dealers and RIAs and highlights this similarity in the context of rollovers. As a result, it would be prudent for RIAs to gather and evaluate the same information that the SEC describes (below) for broker-dealers, and to maintain that information, as well as the reasons for recommending a rollover.
Information to Consider
|DOL List||SEC List|
|Whether to roll over
The Financial Institution should consider the Retirement Investor’s alternatives to a rollover, e.g., leaving the money in the current employer’s Plan, if permitted, and selecting different investment options
|Whether to roll over
|Factors for rollover from plan to IRA
||Factors for rollover or account change
|Rollover from another IRA or change from a commission-based account to a fee-based arrangement:
However, under Reg BI and the RIA interpretation, the consideration of cost is an essential element of developing a recommendation.
|If the Retirement Investor is unwilling to provide the information or information is not otherwise available, Investment Professional must provide:
While the SEC has not addressed this issue, we believe that it is likely that it would adopt the DOL’s analysis, considering the DOL’s experience and expertise in this area.
When financial professionals make rollover recommendations, whether from a plan to an IRA or from one IRA to another, they and their firms should maintain records of the factors reviewed and evaluated in making the recommendation. The DOL mandates documentation; the SEC suggests it for broker-dealers (and, as a result, it could be viewed as a good risk mitigation practice for RIAs). While neither the DOL nor the SEC specify the information that must be considered, both have provided examples of important factors. For the most part, the lists are very similar. As a result, broker-dealers and RIAs should consider reviewing both the SEC and DOL lists of factors and developing a checklist of factors to be used in the process of evaluating the rollover alternative that is in the best interest of a participant.