Joan Neri

Joan Neri represents plan service providers – including broker-dealers and registered investment advisers – and employer plan sponsors and counsels them on fulfilling their obligations under ERISA and complying with the Internal Revenue Code rules governing retirement plans and accounts. Joan advises on ERISA fiduciary status and responsibilities, avoidance of prohibited transactions, the considerations associated with structuring, developing and offering investment products and services to ERISA plans and day-to-day plan operational compliance issues.

View the full bio for Joan Neri at the Faegre Drinker website.

Articles by Joan Neri:


Compensation Requirements under Proposed Amendments to PTE 2020-02

Broker-dealers and their registered representatives (advisors) providing services to private sector tax-qualified and ERISA-governed retirement plans, participants in those plans and IRA owners (collectively, Retirement Investors) are subject to a number of compensation rules.

ERISA’s fiduciary responsibility rules mandate that ERISA plans pay no more than reasonable compensation to service providers (including advisors).

In addition, the prohibited transaction rules that apply to Retirement Investors set limitations on compensation. For example, if a service provider receives compensation in excess of a reasonable amount, the excess is a prohibited transaction for both the plan fiduciary and the service provider. It is also a prohibited transaction if an advisor receives compensation that varies based upon the recommendation made (i.e., variable compensation) or third-party compensation as a result of the recommendation, unless a prohibited transaction exemption applies. Lastly, some prohibited transaction exemptions – like Prohibited Transaction Exemption (PTE) 2020-02 – have other limitations on compensation. This post focuses on the compensation limitations in the DOL’s proposed amendments to PTE 2020-02.

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The Proposed DOL Fiduciary Rule: Significant Changes for Advisers

Benefits and executive compensation partner Fred Reish and counsel Joan Neri coauthored an article for IAA Today on the proposed fiduciary rule issued by the Department of Labor (DOL).

The authors highlight key provisions of the proposal and the amendments to prohibited transaction exemption (PTE) 2020-02 that will potentially impact investment advisers. They also note that the next step is for the DOL to receive comments on the proposed changes and develop a final regulation, and they reasonably expect final rules in mid-year 2024.

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The Best Interest Standard for Recommending Account Types

Under Regulation Best Interest (Reg BI), the SEC imposes a best interest standard on account recommendations by broker-dealers.  This is because recommending an account type is viewed by the SEC as recommending an investment strategy involving securities.  The SEC imposes a similar best interest standard on registered investment advisers under the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers (the RIA Interpretation).

The DOL also imposes a best interest standard under its prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees) (the PTE), which allows broker-dealers and their registered representatives to receive conflicted compensation resulting from non-discretionary fiduciary investment advice about a change of account types for a retirement plan or an IRA.

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Recent State Fiduciary and Best Interest Developments

The number of states adopting rules that follow the Suitability in Annuity Transactions Model Regulation issued by the National Association of Insurance Commissioners (NAIC) continues to grow. Colorado, Massachusetts, Alaska and Tennessee are recent additions to the following State Fiduciary and Best Interest Development chart, bringing the total to 31 as of this date.

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Florida Court Decision’s Impact on Rollover Advice

Key Takeaways:

The Department of Labor (the DOL) expanded its interpretation of fiduciary advice in its guidance issued in connection with Prohibited Transaction Exemption (PTE) 2020-02. As a result, many more broker-dealers and registered representatives (advisors) became fiduciaries under ERISA and/or the Code for their recommendations to retirement investors, including rollover recommendations. Since fiduciary recommendations that result in transaction-based compensation are generally prohibited transactions, they will need the protection provided by complying with the conditions in PTE 2020-02.

A federal district court in Florida (American Securities Association (ASA) v. U.S. Department of Labor, Case No. 8:22-cv-330 (M.D. Fla. Feb. 13, 2023)) set aside the DOL’s expanded interpretation of fiduciary investment advice for rollover recommendations. At the time of writing this article, we do not know whether the DOL will appeal that decision.

However, the court did not change the regulatory definition of fiduciary advice and its application to advice to retirement plans or IRAs. Even if the expanded interpretation for rollover recommendations does not apply, where broker-dealers and their advisors provide ongoing advice to retirement investors they can still be fiduciaries for recommendations to IRA owners, plan fiduciaries and participants (and, in addition, under the DOL’s previous guidance can, in limited circumstances, still be fiduciaries for rollover recommendations). As a result, broker-dealers and their advisors will still need the relief provided by PTE 2020-02, including the best interest process it requires.

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The DOL’s New Fiduciary Rule: What We Can Expect

Key Takeaways:

The current DOL fiduciary rule says that a broker-dealer and its registered representatives (advisors) are fiduciaries to a plan under ERISA if a functional 5-part test is satisfied. This same 5-part test applies to determining whether an advisor is a fiduciary to an IRA under the Internal Revenue Code (the Code).

The DOL expanded its interpretation of fiduciary advice in the Preamble to PTE 2020-02 by re-interpreting one of the elements of that 5-part test. As a result, many more broker-dealers and their advisors are fiduciaries under ERISA and/or the Code for their recommendations to retirement investors, including rollover recommendations. While a recent decision by a Federal District Court in Florida set aside the DOL’s position on fiduciary status due to rollover recommendations, it did not change the 5-part test and its application to advice to retirement plans or IRAs. (We will discuss the impact of that holding on rollover recommendations in a future article.)

The DOL’s regulatory agenda indicates that in the near future, the DOL will be proposing a new fiduciary definition and proposing amendments to existing prohibited transaction exemptions (PTEs) to align with the proposed regulation. While we don’t know what the new regulation will say, we anticipate that, at the least, it will include the DOL’s expanded interpretation of fiduciary advice for rollovers (and might go beyond that). We also anticipate that many of the conditions in PTE 2020-02 will be included in the proposals for other exemptions, for example, in PTE 84-24.

Background

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Managing IRAs: Charging Different Fees for Different Investments

Key Takeaways:

Registered investment advisers, including dual registrant broker-dealers (collectively “advisers”) who provide discretionary investment management services to individual retirement accounts (IRAs), are fiduciaries under the Internal Revenue Code (the “Code”). While the Code does not have a fiduciary standard of care, it does have a duty of loyalty in the sense that most conflicts of interest are prohibited.

The Code prohibits an investment adviser fiduciary to an IRA from using its authority as a fiduciary to receive additional compensation. This means that an adviser with the authority to make asset allocation decisions in an IRA cannot charge a different fee for different investment categories (e.g., equities vs. fixed income) unless a prohibited transaction exemption is available. Alternatively, there are other compensation structures that can be considered.

 

Advisers who manage IRAs may have discretionary authority to determine the asset allocation among equities and fixed income assets based on the investor’s investment objectives, financial needs and circumstances. The fee charged for this service may be a level fee based on the value of all assets – equity and fixed income; in that case, there would not be a conflict that it was a prohibited transaction. But, let’s suppose the adviser wants to charge one fee for advising on the portion of the investor’s IRA portfolio that is allocated to equities, and a lower fee for the portion allocated to fixed income investments, and the adviser has the discretion to decide how much is allocated to equities and how much is allocated to fixed income. As explained later in this article, the allocation to the higher fees (that is, to equities) is an exercise of discretion that is a conflict and a prohibited transaction because it increases the adviser’s compensation.

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Recent State Fiduciary and Best Interest Developments

To date, 27 states have adopted rules that follow the Suitability in Annuity Transactions Model Regulation issued by the National Association of Insurance Commissioners (NAIC). Recent additions reflected in the following State Fiduciary and Best Interest Development chart include: Hawaii, Maryland, Minnesota, North Carolina, South Carolina, South Dakota and Wisconsin. Also, the chart reflects the Robinhood Financial v. Galvin decision by a Massachusetts Superior Court Judge declaring the Massachusetts fiduciary duty rule unlawful as well as a proposed rule issued by the Nevada Commissioner of Insurance imposing new requirements for training producers in connection with the recommendation of annuities.

To view the updates, visit the Resource page.

Download the chart of all the states.