A Rollover Recommendation Is a Securities Recommendation

Key Takeaways

    • The Department of Labor considers a rollover recommendation to be a recommendation to liquidate the investments in a participant’s 401(k) account or to transfer (and change) securities.
    • In addition, as explained in earlier articles, the DOL considers a plan-to-IRA rollover to be a change of account type, e.g., from a 401(k) account to an IRA account.
    • The SEC and FINRA are in alignment with the DOL’s position that a recommendation to roll over is, in effect, a securities recommendation, e.g., to liquidate the investments in the 401(k) account and rollover cash (since 401(k) plans almost never transfer the plan’s investments to an IRA and in some cases, it would not be legally permissible, e.g., collective investment trusts, CITs).
    • This may explain why the DOL, SEC and FINRA all expect broker-dealers and investment advisers to have information about the investments held in a participant’s account, that is, how can a “sell” recommendation be made without knowing the investments that the recommendation covers.

In the preamble to PTE 2020-02, the DOL explained its view that:

 A recommendation to roll assets out of a Title I Plan is necessarily a recommendation to liquidate or transfer the plan’s property interest in the affected assets and the participant’s associated property interest in plan investments.35 Typically the assets, fees, asset management structure, investment options, and investment service options all change with the decision to roll money out of a Title I Plan. Moreover, a distribution recommendation commonly involves either advice to change specific investments in the Title I Plan or to change fees and services directly affecting the return on those investments.

From a practical perspective, a rollover recommendation made to a 401(k) participant is a “sell” recommendation because few, in any, 401(k) plans distribute securities (other than company stock). Think about it . . . how could a 401(k) plan distribute an institutional share class of a mutual fund to a retail IRA or an interest in a CIT to an IRA. (IRAs are not permitted to hold CIT interests.) Even smaller plans which hold retail share classes of mutual funds (load waived) do not distribute shares in the mutual funds, but instead distribute cash.

On the DOL’s second point—related to  “assets, fees, asset management structure, investment options and investment service options”—the DOL’s view that those changes typically occur when a money is distributed from a plan to an IRA is correct from a “real world” perspective. That can also be true of IRA-to-IRA transfers.

In the footnote to the language quoted from the PTE’s preamble, the DOL went on to say:

35 Similarly, the SEC and FINRA have each recognized that recommendations to roll over Plan assets to an IRA will almost always involve a securities transaction. See Regulation Best Interest Release, 84 FR 33339; FINRA Regulatory Notice 13–45 Rollovers to Individual Retirement Accounts (December 2013), available at https://www.finra.org/sites/default/files/NoticeDocument/p418695.pdf.

 The bottom line on this issue is that the DOL, the SEC and FINRA have all taken the position that a rollover recommendation inherently includes a recommendation to sell the participant’s investment (e.g., the holdings of a 401(k) account). As a result, their thinking is that, in order to make that recommendation, broker-dealers and investment advisers need to have enough information about the plan’s investments in order to make an informed “best interest” recommendation to sell those investments.

Concluding Thoughts

 The DOL, SEC and FINRA have largely harmonized their views on rollover recommendations. While the requirements in the DOL’s PTE 2020-02 are more demanding in some ways—for example, the requirement for a written disclosure of why the rollover is in the best interest of the participant, The conceptual approaches are the same. For example, the best interest standard in Reg BI and the best interest in the SEC’s 2019 Interpretation for Investment Advisers are remarkably similar to ERISA’s fiduciary standards of prudence and loyalty. In addition, all 3 view a rollover recommendation as a recommendation to sell the investments in a 401(k) participant’s account. As a result, broker-dealers and investment advisers need to ensure that information about the participant’s plan investments is collected and evaluated as a part of a compliant best interest process.

It is also important to note that, the SEC and FINRA positions affect a wider array of roll over recommendations. While the DOL, SEC and FINRA all regulate recommendations to private sector plans, only the SEC and FINRA cover rollover recommendations to participants in non-ERISA plans, e.g., government plans.

Also, there are lawsuits challenging the DOL’s fiduciary interpretation. If those lawsuits succeed, that could substantially limit the recommendations covered by PTE 2020-02. However, the SEC and FINRA rules will not be affected by the outcomes of those lawsuits. Instead, they will continue to govern rollover recommendations.

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

Share