SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative
This is my 38th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
As explained in my last post (Angles #37), the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert concerning examinations about services offered by RIAs and broker-dealers to investors with retirement accounts. One of the areas specifically identified for those examinations is “Reasonable Basis for Recommendations.” The OCIE described that issue as:
“Registrants have important obligations under the federal securities laws and SRO rules (with respect to broker-dealers) when making recommendations or providing investment advice. To the extent applicable and required, the staff will assess the actions of registrants and their representatives for consistency with these … Read More »
“Un-levelizing” Level Fee Fiduciaries
This is my 31st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
In the last article I posted, I discussed the three meanings of “Level Fee Fiduciary.” This article discusses the kinds of payments or benefits that will “un-levelize” a Level Fee Fiduciary.
As a starting point, the definition of compensation, for these purposes, includes any money or things of monetary value. So, it covers both cash and non-cash amounts. However, as the DOL explains, it must be directly or indirectly connected to a recommendation:
The term ‘‘fee or other compensation, direct or indirect’’ means . . . any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee … Read More »
One of the consequences of the presidential election is that the future of the fiduciary rule (and the exemptions) is uncertain. What does that mean to advisers . . . regardless of whether they are representatives of RIAs or broker-dealers, or for that matter, if they are independent insurance agents?
The answer is that nobody knows. However, this article outlines the most likely alternatives. Those are:
The rule will be killed by regulation or legislation.
The rule will be implemented “as is.”
The rule and the exemptions will be modified.
Only the second alternative (the “as is” option) could realistically be implemented by the current deadline of April 10. But, that’s the alternative that is, in my opinion, the least likely to happen. While it is low probability, it is high risk in the sense that broker-dealers and RIAs must be in compliance by April … Read More »
Reasonable Compensation for IRAs: When and How Long?
This is my twenty-sixth article about interesting observations concerning the fiduciary rule and exemptions.
This article is a little different than most of my previous posts. However, it is equally as important. To get to the point, I am writing this article about reasonable compensation for advice to IRAs because of a common misunderstanding about the requirement.
In the last month or two, I have seen a number of articles and heard several comments to the effect that it will be difficult to determine reasonable compensation for IRAs because the rule is so new. Stated a little differently, the point is that the reasonable compensation requirement for IRAs will first become effective on April 10, 2017. That is not correct.
Section 4975(c)(1)(C) provides that the “furnishing of . . . services . . . between a … Read More »
The Meaning of Differential Compensation Based on Neutral Factors
This is my twenty-fourth article covering interesting observations about the fiduciary rule and exemptions.
The DOL’s fiduciary “package” consists of a regulation that expands the definition of advice and exemptions, or exceptions, from the prohibited transaction (PT) rules. If a recommendation by a fiduciary adviser does not constitute a PT (e.g., does not affect the adviser’s compensation, or that of an affiliate, and does not cause a payment from a third party), no exemption is needed. However, if the fiduciary recommendation causes a PT, an exemption must be used – and most often that will be BICE – the Best Interest Contract Exemption. Therein lies the rub . . . the compensation of the financial institution (e.g., the broker-dealer) and the adviser are regulated by BICE.
Under BICE, the compensation of broker-dealers can be … Read More »
This is my third article about the interesting observations “hidden” in the preambles to the fiduciary regulation and the exemptions.
Under the Best Interest Contract Exemption (BICE), the “financial institution” (e.g., a broker-dealer) cannot pay a fiduciary adviser (e.g., a financial adviser) incentive compensation that would encourage an adviser to make investment or insurance recommendations that are not in the best interest of a retirement investor. Needless to say, that requirement is highly disruptive to broker-dealers and insurance companies, since they often compensate advisers through commission payments (which are, by definition, incentive compensation).
But, the DOL’s concern about the impact of incentive compensation goes beyond payments to advisers. In the preamble to BICE, the DOL says the following about payments to managers and supervisors:
“As noted above, Financial Institutions also must pay attention to the incentives of branch managers and supervisors, and how … Read More »
While you have probably read articles that summarize the DOL’s final fiduciary rule and exemptions—and perhaps even articles that discuss specific aspects of the rules, there are a number of interesting observations “hidden” in the preambles to the regulation and exemptions.
In many cases, those comments are so focused on limited issues or complex that they are beyond the scope of the initial articles, speeches and webcasts. As a result, I will be writing several articles about those “nuggets.” This is the first of those articles.
In the preamble to the Best Interest Contract Exemption (BICE), the DOL noted that a fiduciary adviser and his or her financial institution (e.g., RIA firm or broker-dealer) could contractually limit the duty to monitor. But then the DOL went on to say:
“Further, when determining the extent of the monitoring to be provided, as disclosed in … Read More »
As I work with broker-dealers and RIA firms, certain patterns are developing in their efforts to satisfy the requirements of the DOL’s fiduciary rule and the exemptions.
This article looks at some of those “solutions” and comments on the areas where there is some agreement . . . or at least a majority opinion.
The DOL’s rule will, when finalized, regulate investment advice to plans and participants, investment advice to IRAs, and recommendations about distributions from plans and IRAs.
In this post, I look at the decision being made about advice to plans.
Interestingly, it appears that the changes will impact plans much less than IRAs and rollovers. The plan solutions fall into two categories. The first is that RIAs and broker-dealers will provide level-fee investment advice to plans. In some of those cases, a broker-dealer may need to act under its RIA registration. … Read More »
2016 promises to be the year of the fiduciary . . . the fiduciary rule, that is.
It now seems certain that we will have a final fiduciary rule in effect by the end of 2016.
What will that mean? It will re-write the rules for investment advice and sales to retirement plans and IRAs. The impact will vary, depending upon whether the person making the recommendation is an RIA, a broker-dealer, or an insurance agent or broker.
For example, for RIAs, the greatest impact will be on investment advisers who recommend retirement plan distributions and rollovers and those who receive additional fees (for example, 12b-1 fees) from their IRA investors. On the other hand, advisers of broker-dealers will need to make significant changes in disclosures and compensation practices across the board (that is, for recommendations to plans and IRAs, and recommendations about … Read More »
The increasing regulation of 401(k) distributions and rollovers to IRAs continues to be a subject of great interest to my clients . . . and a considerable amount of work for me. One of the benefits of concentrated work in that area has been an enhanced appreciation of the difficulty of broker-dealers, provider call centers, and RIAs in providing compliant services . . . from a practical perspective.
For example, viewed academically, it is possible to put together a compliant rollover program under FINRA’s guidance in Regulatory Notice 13-45. At the least, that would involve written materials and discussions about the seven factors listed in the guidance. The written materials would be provided to participants to both educate them and to support compliance and supervision. The conversations would be structured to provide a reasonable basis for developing a suitable recommendation, based … Read More »