Category Archives: best interest

Things I Worry About (10): FINRA Enforcement and Senior Investors (2)


best interest, IRA, reg BI, rollovers, SEC
, , , , , , , ,

Key Takeaways

  • FINRA’s 2025 Annual Regulatory Oversight Report 2025-annual-regulatory-oversight-report.pdf included a focus on issues related to retirees and senior investors.
  • The Report provides guidance to broker-dealers about the priorities of FINRA in its regulation, supervision and enforcement programs for broker-dealers. In other words, it is one of FINRA’s ways of telling the regulated community that it should be paying particular attention to certain issues.
  • Consistent with my focus on retirement plans and retirees, I searched the Report for references to retirement, rollovers, elderly and senior investors. As expected, FINRA did have a lot of concern about those subjects. Here is what I found.
  • While the FINRA Report only directly applies to broker-dealers, the issues and concerns apply to investment advisers as well, but the regulator in that case is the SEC.

This article is a sequel to my last one on FINRA’s 2024 Annual Regulatory Report Things I Worry About (9).

Among other things, FINRA is focusing on services and recommendations by broker-dealers and their registered representatives to retirees, senior investors and investors with diminished capacity.  To state the obvious, the regulator is concerned about the aging of the Boomers in real time.

The Report discusses the application of Regulation Best Interest (Reg BI) to rollover recommendations. Here is what it says in the section on Failure to Comply with the Compliance Obligation:

Failing to have written policies and procedures reasonably designed or enforced with respect to account recommendations, for example, by:

  • not being reasonably designed to address recommended transfers of products between brokerage and advisory accounts or rollover recommendations;…

The SEC’s Reg BI says that rollover recommendations are subject to its standards, including the best interest standard of care. The SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors then provides details for the satisfaction of the Reg BI’s duties relative to rollover recommendation. (SEC.gov | Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors). As you might imagine, between Reg BI and the Staff Bulletin, broker-dealers must adopt and implement policies and procedures to ensure that rollover recommendations are developed in a compliant manner. Apparently, some of the broker-dealers examined by FINRA have not done a good job of that. That’s unfortunate since, for most retirement plan participants, a rollover will be the most significant financial decision of their lifetimes.

Beyond that, though, this should be seen as a warning that FINRA will be attentive to this issue in the future and will likely be demanding as time goes by.

In a later part of the Report, under the heading of Effective Practices for the Disclosure Obligation, it says:

Providing Clear Disclosure on Account Type Recommendations: Providing retail customers with clear, accessible materials that allow them to compare the features, benefits and costs of certain account type recommendations (e.g., rollovers).

And under Effective Practices for the Compliance Obligation the Report says:

Implementing New Surveillance Processes: Monitoring associated persons’ compliance with Reg BI by:

  • conducting reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
    • account type or rollover or transfer recommendations that may be inconsistent with a retail customer’s best interest;

My point in quoting these provisions is to illustrate the focus of FINRA on rollover recommendations, which in turn…at least in my view…is a message to broker-dealers that rollovers are on the radar of FINRA for future examinations and, where appropriate, enforcement. The light touch on Reg BI violations may continue for a transition period, but that has a limit.

The Report also focuses on senior and elderly investors, as another message of what is to come. It is certainly no secret that the tail end of the Baby Boomers is reaching retirement age and that the oldest Boomers are now about 80 years old. Issues related to aging are going to be magnified in the future (and, to a degree, are already here). The investment industry will be faced with major challenges related to aging.

Here are other related comments in the Report:

  • Elderly: Under Effective Practices:

    Investigating Unusual Withdrawal Requests: Conducting thorough inquiries when customers— particularly those who may be elderly or vulnerable—request that an unusually significant amount of funds be disbursed to a personal bank account, including where the disbursements would incur losses, fees or negative tax consequences (e.g., a disbursement from a retirement account), as these could be signs of affinity fraud, relationship fraud, Ponzi schemes or other forms of misappropriation.

  • Senior: Under Effective Practices:

    Escalation Process: Implementing and training registered representatives to use a comprehensive process to escalate issues relating to seniors, including but not limited to concerns about financial exploitation, diminished capacity or cognitive decline.

    Senior Investor Specialists: Establishing specialized groups or appointing individuals to handle situations involving elder abuse or diminished capacity; contacting customers’ TCPs—as well as Adult Protective Services, regulators and law enforcement, when necessary—and guiding the development of practices focused on senior customers.

Concluding Thoughts

We have an aging population with all the associated issues, such as diminution of cognitive abilities and the possibility of financial exploitation. That same aging population has, to a significant degree, participated in 401(k) plans and either has or will be rolling their plan benefits over into IRAs, which will likely be their largest financial asset and the source of lifelong income in retirement.

The combination of aging, significant amounts in IRAs, diminution of cognitive abilities, and financial exploitation is a recipe for trouble. Broker-dealers (and investment advisers) need to be attentive to these issues—both to the laws and regulations and to the practical considerations. The loss of substantial financial assets to someone in their 80s or 90s would be a personal tragedy and possibly a liability for financial firms.

Share

Things I Worry About (9): FINRA Enforcement and Senior Investors (1)


best interest, IRA, reg BI, rollovers, SEC
, , , , , , ,

Key Takeaways

  • FINRA’s 2024 Annual Regulatory Oversight Report 2024 FINRA Annual Regulatory Oversight Report | FINRA.org included a focus on issues related to retirees and senior investors.
  • The Report provides guidance to broker-dealers about the priorities of FINRA in its regulation, supervision and enforcement programs for broker-dealers. In other words, it is one of FINRA’s ways of telling the regulated community that it should be paying particular attention to certain issues.
  • Consistent with my focus on retirement plans and retirees, I searched the Report for references to retirement, rollovers and senior investors. As expected, FINRA did have concerns about those subjects. Here is what I found.

Among other things, FINRA is focusing on services and recommendations by broker-dealers and their registered representatives to retirees, senior investors and investors with diminished capacity.

The Report has one part that specifically focuses Reg BI’s application to plan-to-IRA  and IRA-to-IRA transfer recommendations. Here is what it says. The bolding is mine.

Continue reading Things I Worry About (9): FINRA Enforcement and Senior Investors (1) →

Share

The New Fiduciary Rule (50): What is a Best Interest Process?


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, rollovers, SEC
, , ,

Key Takeaways

  • The DOL’s new regulation defining fiduciary advice to include one-time recommendations has been stayed, but advisers who make ongoing individualized recommendations to ERISA-governed retirement plans, participants in those plans, and IRA owners continue to be fiduciaries subject to fiduciary standards. Those standards—prudence and loyalty—can be called a best interest standard.
  • However, the SEC’s fiduciary standard for one-time recommendations by investment advisers continues to apply. The SEC position is most recently documented in its Commission Interpretation Regarding Standard of Conduct for Investment Advisers. The SEC said that the investment adviser duties of care and loyalty—taken together–are a best interest standard.
  • The best interest standard for both broker-dealers and investment advisers has been further defined by the SEC Staff in its Bulletin entitled Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors.
  • In addition, one-time recommendations of insurance products are regulated by state insurance departments and almost all of the states have adopted NAIC Model Regulation #275, “Suitability in Annuity Transactions”, either verbatim or in large part, for recommendations of annuities. The NAIC has referred to this as a best interest standard.
  • This post discusses the basic requirements for a best interest process for making recommendations to ERISA-governed retirement plans, participants in those plans, and IRA owners.
  • Note that Reg BI and the NAIC model rule do not apply to recommendations to retirement plans, but do apply to participants and IRA owners, including rollover recommendations and recommendations to transfer IRAs.

If you study the rules of the various standard-setters, a pattern emerges about their expectations for the process for developing a best interest recommendation. The DOL and SEC are consistent in that regard, while the NAIC model rule is less demanding, as explained later in this article.

Continue reading The New Fiduciary Rule (50): What is a Best Interest Process? →

Share

The New Fiduciary Rule (49): Recommendations to Transfer IRAs (NAIC)


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, SEC
, , , , ,

Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved and if the guidance is vacated, those rules will never be effective.
  • As a result, one-time recommendations to plans, participants and IRA owners will not be fiduciary advice for purposes of ERISA and the Internal Revenue Code.
  • However, one-time recommendations of securities (and insurance products that are securities) are regulated by the SEC for broker-dealers and investment advisers.
  • In addition, one-time recommendations of insurance products are regulated by state insurance departments and almost all of the states have adopted NAIC Model Regulation #275, either verbatim or in large part.
  • This post covers NAIC Model Regulation #275’s provisions for recommending exchanges of individual retirement annuities (also referred to as qualified annuities).

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.

My last post, Fiduciary Rule 48, discussed the DOL’s “old” and continuing definition of fiduciary advice—the 5-part test—and how it might apply to recommendations to transfer IRAs—individual retirement accounts and individual retirement annuities. The post before that, Fiduciary Rule 47, discussed SEC and SEC staff guidance on recommendations to transfer IRAs. This post is about the application of the conduct standards in NAIC Model Regulation #275 to the recommendation of annuities. The Model Regulation has been adopted by substantially all of the states, either verbatim or in large part.

Continue reading The New Fiduciary Rule (49): Recommendations to Transfer IRAs (NAIC) →

Share

The New Fiduciary Rule (48): Recommendations to Transfer IRAs (DOL)


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, SEC
, , ,

Key Takeaways

    • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved and if the guidance is vacated, those rules will never be effective.
    • As a result, one-time recommendations to plans, participants and IRAs will not be fiduciary advice for purposes of ERISA and the Internal Revenue Code.
    • However, one-time recommendations are regulated by the SEC for broker-dealers and investment advisers and by state insurance departments for insurance producers (primarily under the NAIC Model Regulation #275 which has been adopted by most states).
    • My last post discussed SEC and SEC staff guidance on recommendations to transfer IRAs.
    • This post covers likely DOL interpretations concerning recommendations to transfer or exchange of individual retirement accounts and individual retirement annuities.
    • The third post in this series will cover NAIC Model Regulation #275’s provisions for recommending exchanges of individual retirement annuities (also referred to as qualified annuities).

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.

My last post, Fiduciary Rule 47, discussed SEC and SEC staff guidance on recommendations to transfer IRAs. This post is about the DOL’s likely interpretation of how the existing 5-part fiduciary definition applies to IRA transfer recommendations.

Continue reading The New Fiduciary Rule (48): Recommendations to Transfer IRAs (DOL) →

Share

The New Fiduciary Rule (47): Recommendations to Transfer IRAs (SEC)


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, SEC
, , ,

Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • As a result, one-time recommendations to plans, participants and IRAs will not be fiduciary advice for purposes of ERISA and the Internal Revenue Code. However, one-time recommendations are regulated by the SEC for broker-dealers and investment advisers and by state insurance departments for insurance producers (primarily under the NAIC Model Regulation #275 which has been adopted by most states).
  • This post discusses SEC and SEC staff guidance on recommendations to transfer IRAs. The next two will cover likely DOL interpretations and NAIC Model Regulation #275’s provisions concerning the transfer or exchange of individual retirement accounts and individual retirement annuities.

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.]

Continue reading The New Fiduciary Rule (47): Recommendations to Transfer IRAs (SEC) →

Share

The New Fiduciary Rule (46): The Regulation and Exemptions are Stayed—What Remains? (6)


best interest, IRA, rollovers, SEC
, , , ,

Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • The next step will be for those courts to determine if the regulation and exemptions are valid or should be vacated. After that there will likely be appeals. As a result, the “old” regulation and exemptions will continue to be in effect.
  • In addition to the DOL’s guidance, the securities and insurance industries are subject to regulators that focus on the distribution of their products and services. My last post, Fiduciary Rule 45, discussed NAIC Model Regulation #275, which addresses recommendations of annuities generally and, as a result, covers recommendations of annuities in connection with rollover recommendations.
  • This post contrasts the SEC and SEC staff guidance on rollover recommendations—which would cover annuities that are securities, and the NAIC Model Regulation #275’s provisions concerning rollovers into annuities that are not securities.

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 an insurance producer will be a fiduciary under ERISA or the Internal Revenue Code  when making a recommendation to a participant to take his or her money out of a retirement  plan and roll over into a “qualified” annuity (or, more technically, an Individual Retirement Annuity).

Since the probability is that an insurance producer will not be an ERISA or Code  fiduciary, the applicable standard of conduct for a rollover recommendation will either be NAIC Model Rule #275 (“Suitability in Annuity Transactions Model Regulation”, as adopted by almost all of the states MDL-275.pdf (naic.org)) for insurance-only annuities or, for annuities that are securities (e.g., variable annuities or registered index-linked annuities, or RILAs), the SEC’s Regulation Best Interest for broker-dealers or its  “Commission Interpretation Regarding Standard of Conduct for Investment Advisers”.

Continue reading The New Fiduciary Rule (46): The Regulation and Exemptions are Stayed—What Remains? (6) →

Share

The New Fiduciary Rule (45): The Regulation and Exemptions are Stayed (5)—What Remains?


best interest, DOL, rollovers, SEC
, , , ,

Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • The next step will be for those courts to determine if the regulation and exemptions are valid or should be vacated. After that there will likely be appeals. As a result, the “old” regulation and exemptions will continue to be in effect.
  • In addition to the DOL’s guidance, the securities and insurance industry are subject to regulators that focus on their industries. My three prior posts, Fiduciary Rule 42, Fiduciary Rule 43 and Fiduciary Rule 44 discussed SEC and SEC staff guidance about rollover recommendations.
  • This post discusses the NAIC Model Regulation #275 for the insurance industry.

The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” fiduciary regulation (the 5-part test) and the amended exemptions continue in effect indefinitely. As a result, it is unlikely that an insurance producer will be a fiduciary when making a recommendation to a participant to take his or her money out of the plan and roll over into a “qualified” annuity (or, more accurately, an Individual Retirement Annuity). And, if an insurance producer happened to be a fiduciary, the recommendation would need to satisfy ERISA’s prudent person rule and duty of loyalty and the conditions of the existing PTE 84-24, which are much less demanding than PTE 2020-02, which applies to other rollover recommendations.

However, as I said above, it is unlikely that an insurance producer would be a fiduciary. As a result, the standard of conduct would be established by state laws and regulations. By and large, those rules are based on NAIC Model Regulation #275.

Continue reading The New Fiduciary Rule (45): The Regulation and Exemptions are Stayed (5)—What Remains? →

Share

The New Fiduciary Rule (44): The Regulation and Exemptions are Stayed (4)—What Remains?


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, prohibited transaction, rollovers, SEC
, , , ,

Key Takeaways

  • Shortly after the DOL’s new regulation defining fiduciary advice and amended Prohibited Transaction Exemptions 2020-02 and 84-24 were finalized, two lawsuits were filed in Federal District Courts in Texas.
  • The lawsuits sought to “vacate,” or overturn, the regulation and exemptions as being beyond the authority of the DOL. In addition, the plaintiffs requested that the courts “stay” the effective dates of the regulation and exemptions pending the outcome of the lawsuits.
  • Both courts have “stayed” the effective dates, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • The next step will be for those courts to determine if the regulation and exemptions are valid or should be vacated.
  • However, there are still compliance issues related to one-time rollover recommendations.

The DOL’s fiduciary regulation was scheduled to become effective this September 23. The exemptions were scheduled to become partially effective this September 23 and fully effective September 23, 2025.

Two Federal district courts—one in the Eastern District of Texas and the other in the Northern District—have stayed the effective dates. That means that the new rules will not be effective until the courts have decided on the validity of the regulation and exemptions and, most likely, until the appeals are exhausted one way or the other.

Continue reading The New Fiduciary Rule (44): The Regulation and Exemptions are Stayed (4)—What Remains? →

Share

Most Read Insights – Winter 2023


2020-02, best interest, broker-dealers, DOL, fiduciary, IRA, rollovers

Each calendar quarter, benefits and executive compensation partner Fred Reish posts approximately 12 articles on his blog, fredreish.com. This quarterly digest provides links to the most popular posts during the past three months so that you can catch up on what you missed or re-read them.

The New Fiduciary Rule (1): An Overview

In November, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers) and IRAs.

The New Fiduciary Rule (2): The Impact

The U.S. Department of Labor’s proposed fiduciary package will have different impacts on different types of service providers to retirement plans, participants, IRA owners, investment advisers, broker-dealers, banks and trust companies, and insurance agents. The greatest impact of the changes, if finalized as is, will be on insurance agents, particularly independent producers.

The DOL’s Regulatory Agenda and a New Fiduciary Rule

On September 8, the DOL sent a new fiduciary rule and list of prohibited transactions to the Office of Management & Budget in the White House. The DOL proposed amendments to prohibited transaction exemptions, including PTE 84-24, the exemption used for fiduciary rollover recommendations into individual annuity contracts.

Share