Author: Bruce Ashton

Bruce Ashton

Bruce L. Ashton has more than 35 years of experience handling employee benefits matters. His practice concentrates on representing plan service providers (including RIAs, independent record-keepers, third-party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. His experience includes representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and liabilities, and structuring qualified plans, non-qualified deferred compensation arrangements.

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Posts by Bruce Ashton:


The DOL’s Fiduciary Interpretation and Exemption: Impact on Rollover Recommendations

On December 18, 2020, the Department of Labor published its expansion of the fiduciary interpretation and exemption for conflicted advice in the Federal Register. (Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers and Retirees.) The exemption will be effective on February 16, 2021. The interpretation is effective immediately.

Since the effective date for the exemption is after the inauguration of the Biden administration, it is almost certain that the effective date will be further delayed. During that delay, we think it is likely the exemption will be revised or possibly withdrawn. But, it is just as likely that the expanded definition of fiduciary advice for rollover recommendations will be retained and possibly expanded. That could make life more difficult for broker-dealers, investment advisers and insurance companies. While these rules will affect all of those industries, this article focuses on the impact of the likely outcomes on broker-dealers.

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Recent State Fiduciary Duty Developments: Alabama and Rhode Island Issue Regulations

Alabama and Rhode Island are the most recent states to issue regulations setting forth a best interest standard for annuity producers in recommending an annuity to their customers. Both regulations follow the National Association of Insurance Commissioners’ (NAIC’s) model regulation by requiring producers to act in the consumer’s best interest and not place the producer’s financial interest ahead of the consumer’s. Prior to recommending an annuity, producers are required to disclose the scope and terms of their relationship with the consumer, how the producer is being compensated and any material conflicts of interest. Like the NAIC model regulation, the Alabama and Rhode Island regulations do not create a fiduciary obligation or relationship with the consumer and producers are not subject to civil liability for breaching any fiduciary standard of conduct.

The Alabama regulation is still in its proposed form, with comments due December 7, 2020. If finalized without delay, the regulation would take effect on January 1, 2021. The Rhode Island regulation has been finalized and takes effect on April 1, 2021. A copy of the updated state chart can be found here.

Documenting Rollover Recommendations: The DOL and SEC Requirements

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).

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Applicability of Regulation Best Interest to Retirement Plans

The SEC’s Regulation Best Interest (Reg BI) applies to recommendations by a broker-dealer to “retail customers.” As the term suggests, a retail customer is a “natural person” (or the legal representative of a natural person) who uses the recommendation “primarily for personal, family, or household purposes.” This means that advice given to legal entities and advice related to investing the assets of a business are not covered by the regulation. But what about recommendations provided to retirement plans?

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SEC Joint Statement on Form CRS and New FAQs & Upcoming Roundtable

On October 8, 2020, the U.S. Securities and Exchange Commission (SEC) released a joint statement by SEC Chairman Jay Clayton and the SEC’s directors of the Division of Investment Management and the Division of Trading and Markets “Regarding New FAQs for Form CRS” (CRS FAQ Joint Statement). The CRS FAQ Joint Statement offers guidance to both broker-dealers and registered investment advisers (collectively, firms). The focus of this guidance addressed Form CRS disclosures regarding firm or financial professional disciplinary histories. Along with the CRS FAQ Joint Statement, the SEC modified and released its “Frequently Asked Questions on Form CRS” (Form CRS FAQs).

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Comparing the DOL Proposal to the Broker-Dealer and RIA Standards of Conduct

Our recent blog post compared the SEC’s standard of conduct for broker-dealers under Regulation Best Interest (Reg BI) with the standard of conduct for registered investment advisers (RIAs) under the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers (the RIA Interpretation). Here, we add a comparison of the Department of Labor’s (DOL’s) proposed prohibited transaction exemption, which includes in the preamble an expanded interpretation of who qualifies as an investment advice fiduciary under ERISA and the Internal Revenue Code (the DOL Proposal).

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The Second Circuit Upholds Reg BI

On June 26, 2020, the U.S. Court of Appeals for the Second Circuit issued its ruling on the challenge to the legality of the Regulation Best Interest final rule (Reg BI), promulgated by the U.S. Securities and Exchange Commission (SEC) under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. As reported on June 2, 2020, the Second Circuit entertained oral argument. It issued its ruling late in the day on June 26, just prior to Reg BI’s June 30, 2020, implementation date two business days later.

The Second Circuit’s ruling had three holdings: (1) the individual investment adviser petitioner had standing to bring the petition to review, but the state petitioners did not; (2) section 913(f) of the Dodd-Frank Act authorized the SEC to promulgate Reg BI; and (3) Reg BI is not arbitrary and capricious under the Administrative Procedure Act (APA). We focus the analysis herein on the latter two holdings.

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The Second Circuit Hears the Reg BI Challenge Oral Argument

A three-judge panel of the Second Circuit entertained arguments on June 2, 2020, in a lawsuit seeking to vacate and set aside the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest (Reg BI). By way of background and in brief summary, Reg BI requires that broker-dealers make recommendations that are in the “best interest” of the retail customer, disclose conflicts of interest, and specify the services customers are receiving and the associated costs. As previously covered in this blog, the plaintiffs initially challenged Reg BI in September 2019. Despite this pending legal challenge and brokerage firms’ strained resources due to the pandemic and quarantining, SEC Chairman Jay Clayton said on April 2, 2020, in a public statement that the June 30, 2020, compliance deadline for Reg BI would remain.

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