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.

View the full bio for Fred Reish at the Faegre Drinker website.

Posts by Fred Reish:


What Broker-Dealers Need to Know About Correcting PTE 2020-02 Mistakes

Key Takeaways

The DOL expanded its interpretation of fiduciary advice in the Preamble to PTE 2020-02 and as a result, many more broker-dealers and their registered representatives (investment professionals) are fiduciaries for their recommendations to retirement investors, including rollover recommendations. Therefore, they will need the protection provided by PTE 2020-02. The PTE contains a number of conditions and if those conditions are not met, a prohibited transaction will result.

The good news is that the PTE provides a self-correction process. Unfortunately, some conditions of the self-correction process are difficult to interpret and additional DOL guidance is needed.

To avoid these challenges, broker-dealers should implement good processes and documentation to satisfy the PTE conditions and closely supervise their investment professionals to ensure that the processes are followed.

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Compliance with PTE 2020-02: Mitigating Conflicts of Interest

Key Takeaways

  • PTE 2020-02 requires that financial institutions—such as broker-dealers—mitigate conflicts of interest “to the extent that a reasonable person reviewing the policies and procedures and incentives as a whole would conclude that they do not create an incentive for the firm or the investment professional to place their interests ahead of the interest of the retirement investor.
  • The DOL has issued FAQs that provide examples of mitigation techniques to reduce compliance risks in connection with compensation structures.
  • While there are a variety of mitigation techniques that can be used for different types of conflicts, the following two elements need to be part of mitigating every type of conflict: (1) an appropriate best interest process for developing the recommendation; and (2) supervision of the proper implementation of that process.

Background

The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), allows broker-dealers and their registered representatives (advisors) to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to private sector tax-qualified and ERISA-governed retirement plans, participants in those plans, and IRA owners. (The PTE refers to those 3 classes of investors as “retirement investors.”) In addition, in the preamble to the PTE, the DOL announced an expanded definition of fiduciary advice, meaning that many more broker-dealers and their advisors are fiduciaries for their recommendations to retirement investors – including rollover recommendations – and therefore, will need the protection provided by the exemption.

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The Convergence Continues: SEC Staff Bulletin on Standards of Conduct for B-Ds and RIAs

On March 30, 2022, the SEC issued “Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors” (SEC Retail Standards Bulletin). This guidance builds on prior SEC guidance regarding Regulation Best Interest (Reg BI) and the SEC’s “Main Street” initiatives impacting investment advisory firms since the SEC’s self-reporting “Share Class Selection Disclosure Initiative” announced just over four years ago. In the intervening years, the SEC issued a FAQ “Regarding Disclosure of Certain Financial Conflicts of Interest Related to Investment Adviser Compensation” and issued the Reg BI rulemaking package that included the “Commission Interpretation Regarding Standard of Conduct for Investment Advisers.” This blog has covered all of these developments and, regarding the once separate standards of conduct for brokerage and investment advisory firms, described the developing convergence of these standards as they apply to retail investors.

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The New DOL Fiduciary “Rule” For Investment Advisers and Broker-Dealers and the December 20 Deadline: The Time to Act is Now

The DOL’s new fiduciary “rule” became effective on February 16, 2021. The rule is a combination of a new and expansive definition of fiduciary advice (and status) and an exemption from the prohibitions of ERISA and the Internal Revenue Code for financial conflicts of interest arising from nondiscretionary fiduciary advice. These changes impact all investment advisers and broker-dealers who provide services to retirement plans, participants and IRA owners.

This article summarizes the new guidance, the requirements currently in effect, and the demanding additional requirements that must be satisfied beginning on December 21, 2021. And, beginning on December 21, the full terms of Prohibited Transaction Exemption (PTE) 2020-02 will apply, including the acknowledgement of fiduciary status, the conflicts and services disclosures and, for the types of rollovers discussed below, the written statement of the “specific reasons” the rollover recommendation is in the best interest of the participant or IRA owner.

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FINRA’s Focus on Variable Annuity Switches Continues

On January 8, 2021, without admitting or denying the findings, VALIC Financial Advisors, Inc., (VALIC) entered into a settlement with FINRA Enforcement, through an Acceptance, Waiver and Consent (AWC) where the factual allegation was that between January 1, 2017, and October 31, 2018, the broker-dealer failed to “establish a reasonably designed system and written supervisory procedures for the surveillance of rates of [Variable Annuities] exchanges and for corrective action in the case of inappropriate exchanges, in violation of FINRA Rules 2330(d), 3110, and 2010.” VALIC agreed to a censure and a $350,000 fine. See VALIC Financial Advisors, Inc. AWC No. 2018060548501.

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The Second Phase of the SEC’s Reg BI Exams

Closing out 2020, the SEC’s Division of Examinations (OCIE) issued a Statement on Recent and Upcoming Regulation Best Interest Examinations. There the Division of Examinations announced its intention “to begin its next phase [of Reg BI examinations] by conducting more focused examinations … beginning in January 2021.”

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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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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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