Welcome to the Broker-Dealer Regulation & Litigation Digest – a periodic compilation of the most popular blog posts from the Broker-Dealer Law Blog during the last few months. If you don’t already receive our posts, you can subscribe to the blog.
Continue reading “Broker-Dealer Regulation & Litigation Digest – Fall 2020”
Reg BI has passed its compliance date of June 30, 2020. The SEC and FINRA have commenced examinations to test brokerage firms’ good faith compliance with Reg BI and Form CRS disclosure satisfaction. Our article “Have No Fear, Reg BI Is Finally Here” provides a brief overview of Reg BI and deciphers its implications for brokers and broker-dealers. It also provides an overview of a recent Risk Alert drafted by the SEC’s Office of Compliance Inspections and Examinations (OCIE), and examines the SEC’s and FINRA’s review of Reg BI compliance.
The SEC’s standard of conduct for broker-dealers under Regulation Best Interest (Reg BI) became effective on June 30, 2020. While registered investment advisers (RIAs) always have been subject to a best interest standard of conduct (i.e., the overarching standard that encompasses both the duty of care and the duty of loyalty), the SEC’s clarification of that standard in its Interpretation Regarding Standard of Conduct for Investment Advisers (the RIA Interpretation) has been in effect since July 12, 2019. There are similarities in these two standards, but there are significant differences as well. Here is how the two standards compare:
Continue reading “Comparing the Standard of Conduct: Broker-Dealers vs. Investment Advisers”
The SEC recently announced its first round of settlements with registered investment advisors (RIAs) who had self-reported pursuant to the agency’s Share Class Selection Disclosure Initiative (SCSD Initiative). Additional RIA settlements pursuant to the SCSD Initiative are expected, and RIAs who did not self-report face additional scrutiny from the Division of Enforcement. Industry reaction has involved frustration, but the SEC’s focus on RIA conflicts of interest, disclosures, and more recently revenue sharing is increasing. Jim Lundy and Mary Hansen discuss these developments in this article, SEC Releases SCSD Self-Reporting Initiative Settlements.
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”
In a previous post, we discussed why broker-dealers and their representatives will likely still be fiduciaries to ERISA plans and IRA investors in many cases despite the DOL Fiduciary Rule’s impending death (we say “impending” because, while the Fifth Circuit’s ruling in mid-March vacates the Fiduciary Rule in its entirety, the court’s official order implementing this decision has yet to be issued). To review, this is because broker-dealers and their representatives often satisfy all the prongs of the soon-to-be reinstated 1975 fiduciary regulation’s “Five-Part Test” defining when investment recommendations rise to the level of “fiduciary” advice. Previous industry assumptions that brokers and other “sellers” of investments generally were not fiduciaries under the 1975 regulation should no longer be relied upon. In this post, we’ll examine how the Fiduciary Rule’s impending demise will affect prohibited transaction and compensation issues for broker-dealers in light of their likely continuing status as fiduciaries. Continue reading “Why Fiduciary Status Still Matters in a Post-Fiduciary Rule World: A Look at Prohibited Transactions And Compensation”
The “old” rules will again prevail—but the old rules will not be applied in the old ways, and this will have some significant impacts on broker-dealers.
As the DOL has not asked for a rehearing of the Fifth Circuit’s decision vacating the Fiduciary Rule, or yet sought to appeal the decision, it is widely anticipated that the March 15 ruling will soon take effect, restoring the DOL’s 1975 regulation defining fiduciary investment advice to plan and IRA investors (we say “widely anticipated” because, while the official mandate vacating the Fiduciary Rule is expected soon, it has been delayed while the court considers efforts from certain states and other third parties to intervene in the case). While the SEC has proposed new regulations for broker-dealers, and while we expect the DOL to propose new prohibited transaction exemptions or regulations that will coordinate with the SEC’s actions, it will be at least a year before these initiatives could begin to apply. Continue reading “Old Standard, New Day: The Death of the Fiduciary Rule Doesn’t Mean That Broker-Dealers Won’t be Fiduciaries”
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.
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.
Most of us want to help family members – especially with issues in our realm of experience. But helping family members with their IRAs creates a problem under the “prohibited transaction” rules of the Internal Revenue Code (the “Code”). (Similar issues arise in connection with retirement plan accounts under the ERISA rules, but as we discuss later, the consequences aren’t quite as severe. Thus, our focus in this article is on IRAs.)
In our experience, this problem is not well-known and will come as an unpleasant surprise to many. To help you make sense of this, we are getting a little deeper into the legal weeds than we usually do.
Continue reading “Family Members as Investors in IRAs and Plans”
