The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely. As a result, it is unlikely that one-time plan-to-IRA rollover recommendations will be fiduciary recommendations under ERISA or the Internal Revenue Code. However, the standards of conduct for recommendations to transfer IRAs (that is, either individual retirement accounts or individual retirement annuities) are also governed by other regulators (and may still be subject to the DOL’s “old” fiduciary definition). This article and the next two will discuss conduct standards for IRA (including qualified annuities) of  the SEC, NAIC and DOL.

The SEC’s guidance is found in Regulation Best Interest (Reg BI) for broker-dealers and the Commission Interpretation Regarding Standard of Conduct for Investment Advisers (IA Interpretation). While Reg BI imposes a “best interest” standard and the IA Interpretation concerns  a fiduciary standard, the SEC staff, in its SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors explained: Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the staff’s view, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors. [The emphasis is mine.]

For our purposes, I think it is fair to say that the quoted language means that the processes and standards for recommendations of IRA transfers by broker-dealers and investment advisers are virtually the same.

Also, keep in mind that, while the “old” and continuing DOL fiduciary regulation (the 5-part test) requires that, to be a fiduciary, advice must be provided on a regular (or repeated) basis, the SEC’s rules apply to one-time recommendations.

While Reg BI and the IA Interpretation regard recommendations to transfer IRAs as covered recommendations, the more detailed explanation can be found in the Staff Bulletin. In relevant part, the Bulletin says: To evaluate any recommendation to transfer assets out of an employer’s plan, or between individual retirement accounts, you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan. [Note that “plan” includes IRAs for this purpose.]

The Bulletin lists a number of factors that should be considered in developing a recommendation to roll over from a plan to an IRA. That discussion is helpful in understanding the expectations of the staff for a comparative analysis of the factors to be considered in recommendations to transfer IRAs:

In addition to the factors discussed above, the staff believes that there are specific factors potentially relevant to rollovers that you should generally consider when making a rollover recommendation to a retail investor. These factors include, without limitation, costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock.

Comment: Applying the relevant parts to an IRA transfer recommendation, the investments, services and expenses in the current IRA should be compared to those for the proposed IRA. This process should identify the benefits and detriments of the current IRA and the proposal. That means that an advisor would need to have information about the current IRA’s investments, services and expenses, and an idea of how the new IRA would be invested and serviced. This is virtually identical to the DOL’s guidance on the process and information for fiduciary recommendations to transfer IRAs.

As with account recommendations more generally, relevant factors should be considered in light of, among other things, the retail investor’s investment profile to develop a reasonable belief that the retirement account or rollover recommendation is in the retail investor’s best interest.

Comment: In other words, the comparative analysis of the current and proposed IRAs must be done in light of the particular needs and circumstances of the IRA owner. That is, the recommendation must be individualized. Again, this is consistent with the DOL’s approach to fiduciary recommendations to transfer IRAs.

In the staff’s view, when making a rollover recommendation, it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for the recommendation.

Comment: As a practical matter, the SEC staff is saying that a broker-dealer or investment adviser is taking significant risk is it does not document why the recommendation is in the best interest of the IRA owner. As the SEC explained in Reg BI, this is not a generic, one-size-fits-all analysis, but instead must be based on the individual retirement investor. In other words, the staff is saying that the records (that is, the information about the existing IRA and the evaluation and conclusion) should be retained as an internal compliance document (but would not need to be disclosed to the IRA owner).

This is similar to the DOL’s approach in the stayed PTE 2020-02 (in the sense that it would have removed the requirement to disclose the specific reasons to the IRA owner, while taking an internal documentation approach similar to the SEC’s). However, since the amended PTE was stayed, the existing PTE 2020-02 is the operative document. It does require a best interest disclosure to the IRA owner in connection with a fiduciary recommendation to transfer an IRA.

Concluding Thoughts

The SEC and its staff view the process and information for recommending IRA transfers in much the same way as the DOL. As a result, the stay of the DOL’s one-time fiduciary definition provides less relief for broker-dealers and investment advisers than might be expected.

As a result, when broker-dealers or investment advisers recommend IRA transfers, including of annuities that are securities (e.g., variable annuities or registered index-linked annuities, RILAs), they need to obtain and evaluate—and then document–information about the products and the needs and circumstances of the IRA owner. That is similar to the process required by the DOL for fiduciary recommendations.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.