On January 28, 2019, FINRA released its Regulatory Notice 19-04 announcing its 529 plan self-reporting initiative. This initiative is part of FINRA efforts to have broker-dealers promptly remedy potential supervisory and suitability violations related to recommendations of share classes for 529 plans. Continue reading “Alert: FINRA’s 529 Plan Share Class Initiative to Self-Report”
Fred Reish
Articles by Fred Reish:
The Continuing Convergence of Retail and Retirement Regulatory Oversight
Last month the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued its “2019 Examination Priorities.” The release of OCIE’s 2019 Priorities this year was earlier than in years past. In retrospect, the date of issuance being the last day before the vast majority of the SEC staff was furloughed may just be coincidental, but the federal government shutdown allowed the industry more time to study OCIE’s 2019 Priorities for compliance planning for the upcoming year. Another impact of the shutdown and furloughs in an area directly related to OCIE’s first priority is that the SEC’s efforts and the timing of the finalization of the Reg BI proposals have very likely been slowed as well. The recent ending of the SEC furloughs and OCIE’s continuing prioritization of retail and retirement regulatory issues presents us with an opportune time to re-visit these important topics.
Continue reading “The Continuing Convergence of Retail and Retirement Regulatory Oversight”
Recommending Rollovers in the Evolving Regulatory Environment (Part 3)
In Parts 1 and 2 of this post, we talked about the current and proposed rules applicable to rollover recommendations by broker-dealers and RIAs. Part 1 discussed the DOL and FINRA rules that apply now. In Part 2, we explained the SEC proposals. In this post, we talk about how to make a compliant rollover recommendation, regardless of which set of rules applies.
(“Rollover recommendation” refers to advice to a retirement plan participant to take a distribution of his or her account and roll it over to an IRA that is being advised by the broker-dealer or RIA.)
Continue reading “Recommending Rollovers in the Evolving Regulatory Environment (Part 3)”
Recommending Rollovers in the Evolving Regulatory Environment (Part 2)
In our first post on this topic, we discussed the existing rules that apply to rollover recommendations by broker-dealers and RIAs. This discussion included the ERISA guidance that remains after the 5th Circuit’s decision vacating the Fiduciary Rule, as well as FINRA’s Regulatory Notice 13-45. In this post, we focus on the SEC’s best interest proposals for broker-dealers and RIAs and where that may take firms in the future. In our next, and final, post in this series, we’ll talk about how to make a compliant rollover recommendation.
(As a reminder, by “rollover” recommendation, we mean a recommendation to a retirement plan participant to take a distribution of his or her account and roll it over to an IRA being advised by the broker-dealer or RIA.)
Continue reading “Recommending Rollovers in the Evolving Regulatory Environment (Part 2)”
Recommending Rollovers in the Evolving Regulatory Environment (Part 1)
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. Continue reading “Recommending Rollovers in the Evolving Regulatory Environment (Part 1)”
The Fate of the Fiduciary Rule: What is Not Affected
While we won’t know until the end of the month whether the DOL fiduciary rule will survive beyond May 7, there are some activities that won’t be affected, regardless of what happens.
Let’s start by reviewing basics. A fiduciary under ERISA and the Internal Revenue Code (the “Code”) includes one who provides investment advice to an ERISA plan and/or IRA for a fee –an “advice fiduciary.” Before the new DOL fiduciary rule, a broker-dealer or RIA (referred to here as a “firm”) would be considered an advice fiduciary if a five-part test was satisfied: (1) its advisor provided advice for compensation about a security or other property, (2) on a regular basis, (3) pursuant to a mutual understanding, (4) that the advice would form a primary basis for the investor’s decision and (5) it was individualized based upon the investor’s particular needs. If the DOL’s new fiduciary rule does not survive, the five-part test will come back into effect.
Regardless of whether the DOL fiduciary rule or the five-part test applies, there are some things that will remain unchanged:
• Investment Management Services: Discretionary investment management for ERISA plans or IRAs is and will continue to be a fiduciary service. This is because under both ERISA and the Code, there is a definition of “fiduciary” separate and apart from an “advice fiduciary.” That definition says that a broker-dealer or RIA, or its representative, is a fiduciary when it has discretion over ERISA or IRA assets. This means that investment management services for ERISA plans are, and continue to be, subject to ERISA’s prudent man standard of care and duty of loyalty. Also, managing ERISA and/or IRA plan assets is, and will continue to be, subject to the fiduciary prohibited transaction rules in ERISA and the Code. Firms need to have policies, training and supervisory processes in place to ensure that advisors providing investment management services to ERISA plans and/or IRAs comply with these rules, even if the DOL fiduciary rule does not survive.
• Reasonable Compensation: Firms also need to make sure that compensation for services to ERISA plans or IRAs is reasonable, because unreasonable compensation is a prohibited transaction under both the Code and ERISA. This requirement applies to all service providers to plans, participants and IRAs, and to service providers who are not fiduciaries. Firms need to develop systems and data to determine reasonable compensation for different products and services and to manage advisor compensation practices.
• Rollover Recommendations by Fiduciary Advisors: Even if the DOL fiduciary rule does not survive, some rollover recommendations may still be fiduciary acts. Specifically, under a DOL advisory opinion, if an advisor (and the firm) is a plan fiduciary and its advisor recommends that a plan participant take a distribution and roll over to an IRA, the advisor will be a fiduciary for that purpose. As such, the advisor’s recommendation needs to satisfy the ERISA prudent man standard. Additionally, if the DOL fiduciary rule does not survive, there will not be a Best Interest Contract Exemption to “cure” the resulting prohibited transaction. If, on the other hand, the firm is not a fiduciary to the plan and the advisor recommends a rollover, it will not be a fiduciary act if the DOL fiduciary rule does not survive. Firms should examine their current rollover practices and determine what processes will need to be retained to address these issues.
• Ongoing Advisory Services: Providing ongoing investment advisory services to ERISA plans or IRAs based upon the particular needs of the retirement investor will continue to be a fiduciary act even if the DOL fiduciary rule is vacated. The reason is that under most advisory arrangements, the advisor is providing the advice on a regular basis and meeting the other elements of the five-part test. The firm should identify current arrangements that satisfy the five-part test and make sure there are policies and procedures in place to ensure compliance with the prohibited transaction rules and exemptions and, in the case of ERISA plan services, compliance with the prudent man rule and duty of loyalty.
While the possible demise of the DOL fiduciary rule will limit the scope of investment activities that are fiduciary in nature, there are still investment services that will be fiduciary and thus subject to the prohibited transaction requirements. As a result, firms should take steps now to identify those activities and take appropriate steps for compliance.
Bye-Bye Fiduciary Rule?
Should you say goodbye to the Fiduciary Rule? Maybe, but not just yet. The DOL has until the end of April to decide whether to let the 5th Circuit decision vacating the Fiduciary Rule stand or try to get it over-turned. If they do nothing, the ruling becomes effective May 7, and bye-bye Fiduciary Rule – the regulation re-defining fiduciary investment advice for plans and IRAs and the related prohibited transaction exemptions.
Many pundits say this is what will happen. But it’s possible that the DOL will either ask the court to reverse itself – this would mean the 15 judge panel agreeing to re-hear and re-decide the case – or try to get the Supreme Court (SCOTUS) to accept an appeal. SCOTUS doesn’t have to do that, so those who think the DOL won’t let this go are betting on the re-hearing request. While requests for rehearing are rarely granted, in this case there might be a better chance. The decision vacating the Fiduciary Rule was a split decision, with Chief Judge Carl E. Stewart dissenting in favor of the Rule.
Fiduciary Rule Myths
MYTH: “Advisors must recommend the best available investment.”
We recently pointed out that under the DOL fiduciary rule, it’s a myth that advisors have to recommend the lowest cost investment. They don’t.
Here’s another myth about investment recommendations that isn’t true: advisors have to recommend the best investment to their customers. Presumably, this comes up because of the Impartial Conduct Standards in the Best Interest Contract Exemption (BICE). One of the requirements in those Standards is that a recommendation be in the best interest of the customer. This best interest requirement may lead some to think that advisors have to meet an essentially impossible standard. As with a lowest-cost recommendation, however, a mandate to recommend the best investment is a myth…it just isn’t true. Even the DOL has said so:
SEC’s 2018 Exam Priorities – Worth the Wait
The SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2018 National Exam Program Examination Priorities on February 7, 2018 (“2018 Priorities Letter”). While issued later than in years past and almost a month to the day after the publication of the priorities letter from the Financial Industry Regulatory Authority (FINRA), OCIE deserves credit for the increased transparency and guidance provided in the 2018 Priorities Letter. By way of perspective, OCIE’s sixth publication of its examination priorities more than doubled the amount of information provided in last year’s edition. This improved transparency is consistent with the public statements of OCIE’s Director. Despite the greater detail, there appears to be one glaring omission: OCIE does not discuss how the anticipated rulemaking by the Commission regarding the development of a fiduciary standard may impact its priorities. However, upon further consideration and recalling that OCIE’s primary mission is to conduct examinations to assess compliance with the current securities laws, we realize it would have been premature for OCIE to discuss views on some yet-to-be formulated SEC fiduciary standard. That said, OCIE is clearly prioritizing the protection of retail investors even more than in years past, which is consistent with the SEC Chairman’s public statements about prioritizing the protection of “Main Street” investors. While the SEC Chairman has made these issues a “Main” priority, the SEC’s heightened focus regarding retail and retirement investors has been strengthening significantly since the Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative announced a few years ago and through the SEC’s announcement this past autumn of the Retail Strategy Task Force. Thus, OCIE leads into the 2018 Priorities Letter in the second and third sentences by opening with: “…we will continue to prioritize our commitment to protect retail investors, including seniors and those saving for retirement. We will especially be looking closely at products and services offered to retail investors, as well as the disclosures they receive about those investments.” This focus is similar to the focuses emphasized by FINRA in its recent priorities letter. Continue reading “SEC’s 2018 Exam Priorities – Worth the Wait”
FINRA 2018 Annual Regulatory and Examination Priorities Letter Makes No Mention of a Fiduciary Duty for Brokers
FINRA released its 2018 Annual Regulatory and Examination Priorities Letter (Priorities Letter) on January 8, 2018. While FINRA advises that it can change its priorities in response to circumstances, the purpose of the Priorities Letter is to permit broker-dealers to plan their compliance, supervisory and risk management programs and to prepare for FINRA examinations. Therefore, this Priorities Letter is significant both in what it says and in what it has chosen not to say including failing to discuss FINRA’s views regarding a “fiduciary standard.”
Continue reading “FINRA 2018 Annual Regulatory and Examination Priorities Letter Makes No Mention of a Fiduciary Duty for Brokers”