The DOL’s expanded definition of fiduciary advice is described in the preamble to PTE 2020-02.
When conflicted fiduciary advice is given to retirement investors (that is, retirement plans, participants (including rollovers), and IRA owners), it results in prohibited transactions under the Internal Revenue Code and ERISA. But the PTE provides relief for conflicted non-discretionary recommendations.
While most of the focus of the literature (and of these blog articles) about rollover recommendations has been on the DOL’s fiduciary interpretation and PTE 2020-02, the SEC has, for the most part, harmonized its best interest/fiduciary requirements for rollover recommendations with those of the DOL.
This article discusses the two-part harmony between the agencies, and the areas of disharmony.
The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), allows investment advisers, broker-dealers, banks, and insurance companies (“financial institutions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations), and IRA owners (all of whom are referred to as “retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals are fiduciaries for their recommendations to retirement investors and therefore will need the protection provided by the exemption.
For example, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a prohibited transaction under both ERISA and the Internal Revenue Code (i.e., the compensation earned from the rollover IRA). But, since the recommendation is nondiscretionary, PTE 2020-02 provides relief, but only if its conditions are met.
The SEC guidance on rollovers can be found in:
- Regulation Best Interest for broker-dealers.
- Commission Interpretation Regarding Standard of Conduct for Investment Advisers.
- SEC.gov | Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors 
The Staff Bulletin goes into the greatest detail and will be the primary source for this article.
SEC terminology differs from that of the DOL, so for context here is how the SEC and DOL terminology matches up:
- DOL: retirement investor, participant or IRA owner; SEC: retail investor.
- DOL: participant account or individual retirement account (IRA); SEC: account type.
Best Interest is Principles-Based and Applies to both Broker-Dealers and Investment Advisers
With that in mind, the SEC Staff Bulletin starts by explaining that, while there is separate guidance for broker-dealers and investment advisers, a “best interest” recommendation by either should produce the same result. In the rollover or IRA transfer context, it means that the recommendation to move those retirement assets into an IRA should be in the best interest of the retail investor (that is, participant or IRA owner).
Both Regulation Best Interest (“Reg BI”) for broker-dealers and the fiduciary standard for investment advisers under the Investment Advisers Act (the “IA fiduciary standard”) are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest. 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 Best Interest Process Begins With the Investor Profile
The first step in the best interest process is obtaining the investor information needed to make a best interest recommendation. In order to determine what is in the best interest of that retail investor, it is imperative to know the needs and circumstances of the retail investor. The SEC Staff Bulletin explains:
Factors to consider before making an account recommendation.
Both Reg BI and the IA fiduciary standard require you to have a reasonable basis for an account recommendation, based on a reasonable understanding of the retail investor’s investment profile and the account characteristics.
What are examples of investor characteristics I should consider to have a reasonable basis to believe the recommendation is in the retail investor’s best interest?
As part of establishing a reasonable understanding of the retail investor’s investment profile, the staff believes that you should consider, without limitation, the retail investor’s: financial situation (including current income) and needs; investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; investment experience; investment objectives and financial goals; and any other information the retail investor may disclose to you in connection with an account recommendation. The staff also believes that you should consider, without limitation, the retail investor’s: anticipated investment strategy (e.g., buy and hold versus more frequent trading); level of financial sophistication; preference for making their own investment decisions or relying on advice from a financial professional; and the need or desire for account monitoring or ongoing account management.
You must, in any case, obtain and evaluate enough information about the retail investor to have a reasonable basis to believe the account recommendation is in the best interest of that retail investor and that your recommendation is not based on materially inaccurate or incomplete information.
The Next Step is to Obtain and Consider Information About the Plan
Equipped with the relevant information about the retail, or retirement, investor, the SEC staff describes other considerations. As with the need for information about the retirement investor (e.g., the participant or IRA owner), these factors parallel the DOL’s guidance.
Retirement Account Rollover Recommendations
Are there additional factors that I should consider when making a rollover recommendation in order to have a reasonable basis to believe the recommendation is in the retail investor’s best interest?
Yes. When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest. 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.
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.
The Staff Bulletin goes on to point out the importance of also complying with the conditions in the DOL’s PTE 2020-02:
In addition to Reg BI and the IA fiduciary standard, some rollovers also are subject to regulation by the Department of Labor. If you are relying on Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”), you may want to review guidance from the Department of Labor on factors to consider in making a rollover recommendation, as well as relevant documentation requirements.
The references to the costs, level of services, features of the accounts, and investment options are almost identical to the DOL requirement to do a comparative analysis of the investments, services and costs of the plan and the proposed IRA. The other factors would also likely be considered material by the DOL.
Documentation of the Factors Considered in the Best Interest Process
The Staff Bulletin then discusses the staff’s views on documenting and retaining the documentation and information underlying the best interest determination that a rollover recommendation was in the best interest of the retail investor:
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.
On the other hand, PTE 2020-02 specifically requires that a broker-dealer or investment adviser retain for a period of 6 years the underlying documentation necessary to prove compliance with the conditions of the PTE, including the best interest standard of care. The SEC Staff points out the importance (and risk mitigation) of retaining documentation of compliance; however, neither Reg BI or the IA Interpretation specifically require the retention of the information supporting account type recommendations. (Note: While there are other document retention requirements for broker-dealers and investment advisers, it’s not necessary for this article to go into those. For those who are interested, look at Q&A 6 of the Staff Bulletin.)
Consideration of Costs as a Part of the Best Interest Process
How important is the consideration of costs? The DOL’s position is that costs are a significant consideration, but not the only consideration. Here’s what the SEC Staff said:
Consideration of Costs in Account Recommendations
Are costs always a relevant factor to consider when making account recommendations?
Yes, you must always consider cost as a factor when making an account recommendation. While Reg BI and the IA fiduciary standard do not always obligate you to recommend the least expensive type of account, both require you to have a reasonable basis to believe that the account recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest. As discussed further below, if you recommend a higher cost account, you must have a reasonable basis to believe the account recommendation is nonetheless in the retail investor’s best interest based on other factors and in light of the particular situation and needs of the retail investor. The Commission has pursued enforcement actions against investment advisers for recommending higher-cost products to clients when similar, lower-cost products were available.
Once again, the agencies are in alignment in their views.
Consideration of the Alternatives Available to the Retail/Retirement Investor
The DOL says that, in making a rollover recommendation, investment professionals and financial institutions must consider the alternatives of: Leave the money in the plan; rollover to the plan of a new employer; rollover to an IRA; or take a taxable distribution.
What did the SEC Staff say about that?
Retirement Account Rollover Recommendation
When considering a rollover recommendation, do I have to consider the option of leaving the retail investor’s investments in the employer’s plan?
As discussed above, you must have a reasonable basis to believe that an account recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest. In the staff’s view, it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option. 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.
While the Staff Bulletin didn’t mention taking a taxable distribution or rolling to the plan of a new employer, the latter—rolling to a new plan—is, if available, an account type that may need to be considered in determining which account type is in the best interest of the retail, or retirement, investor.
Differences in SEC and DOL Guidance
This article has primarily focused on the similarities between DOL and SEC considerations for making rollover recommendations. Are there any significant differences in their scope or requirements? Yes.
The DOL’s PTE 2020-02 requires that, when a rollover recommendation is made, the participant must be provided, in writing, with the “specific reasons” why the rollover recommendation is in the best interest of the participant. There is not a similar requirement of the SEC.
The DOL’s rules apply only to rollover recommendations from ERISA-governed plans and private sector qualified plans. The SEC’s rules apply to rollover recommendations to all plans, including non-ERISA plans such as government plans.
So, while the governance of the two agencies is similar, it is not identical.
While the DOL’s fiduciary interpretation and exemption are seen as demanding and burdensome, in reality they are not so different from the SEC requirements (as expressed by the Staff Bulletin).
In the final analysis, broker-dealers and investment advisers need to have compliant practices that satisfy both SEC and DOL standards. For private sector plans, it appears that compliance with the DOL requirements will satisfy the guidance in the SEC Staff Bulletin.
For plans not covered by the fiduciary and prohibited transaction rules in ERISA and the Code, the SEC still has jurisdiction and the most efficient course of action for SEC compliance might be to apply the PTE 2020-02 approach to rollover recommendations to participants in those (e.g., government) plans.
- While this article refers to the “SEC”, the cited guidance is by the Staff and, as such, does not necessarily reflect the views of the Commission.
- The DOL guidance includes 5 types of “rollovers.” The discussion in this article generally applies to all 5. Specifically, the article can be read as applying to plan-to-IRA rollover recommendations and IRA-to-IRA transfer recommendations.
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