Category Archives: DOL

Interesting Angles on the DOL’s Fiduciary Rule #40


DOL, fiduciary, General, prohibited transaction, registered investment advisers

New Rule, Old Rule: What Should Advisers Do Now?

This is my 40th 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 and related developments in the securities laws.

Now that it seems clear that the applicability date of the new fiduciary regulation will be delayed, many advisers (including broker-dealers and RIA firms) may heave a sigh of relief. However, while some relief is justified, that does not mean that their services are not governed, in many cases, by the “old” fiduciary regulation. (By “old” rule, I refer to the DOL regulation that defines fiduciary advice and that has been in effect for decades.) With all the attention that has been devoted to fiduciary status and prohibited transactions, it is possible, perhaps even probable, that the old rule will be applied more vigorously. As a result, advisers need to understand its provisions and need to review their practices to determine whether they are currently acting as fiduciaries under the old rule. To properly discuss that issue, advisory services need to be divided into four categories: advice to plans; advice to participants; advice to IRAs; and recommendations of plan distributions and rollovers. This article will discuss the first of those categories . . . advice to retirement plans.

Briefly stated, the old—and current–fiduciary rule has a five-part test:

  • A recommendation of an investment, insurance product, investment manager, and/or investment strategy or policy.
  • The advice must be given on a regular basis, that is, on an ongoing basis.
  • There must be a mutual understanding between the adviser and the plan fiduciaries.
  • The understanding is that the advice will be a primary basis for decision-making.
  • The advice is individualized and based on the particular needs of the plan.

With regard to qualified retirement plans (for example, 401(k) plans), those conditions will likely be satisfied in many cases. For example, it is common, perhaps even typical, for an adviser to meet with plan fiduciaries quarterly or annually. As a result, the advice is given on a regular basis. Similarly, when an adviser provides a list of investments, it is difficult to say that they are not individualized to the plan, because of the suitability requirements that apply to broker-dealers, RIAs, and insurance agents. In any event, there is a significant risk that an adviser who provides a list of investments to plan fiduciaries will be considered to have made fiduciary recommendations.

As a result, and with likely heightened scrutiny of advisers’ recommendations and fiduciary status, broker-dealers and insurance agents should consider whether they are willing to run the risk of being a fiduciary. (As this suggests, RIA’s probably are fiduciaries for ERISA plans.) And, if they are willing to be fiduciaries, there should be a formal program in place for that purpose. For example, a broker-dealer might establish a fiduciary advisory program under its corporate RIA and allow its most experienced retirement plan advisers to participate in that program. For those advisers who won’t be allowed to be fiduciaries under the RIA program, those broker-dealers should consider requiring that the advisers only recommend 401(k) providers who have platform fiduciaries. For example, a recordkeeping platform might offer a 3(21) non-discretionary fiduciary investment adviser and/or a 3(38) discretionary fiduciary investment manager. In that case, the platform fiduciary would recommend or select the investments, while the adviser would provide other services to the plan, for example, assistance with plan design, coordination with the recordkeeper, participant education meetings, and so on.

My point is that, now that we are more aware of the fiduciary definitions and the impact of fiduciary status, advisers need to be more attentive to their services and to whether those services result in fiduciary status. Correspondingly, their supervisory entities (for example, broker-dealers) need to make decisions about how those services will be offered, including whether some of the registered representatives can be 401(k) fiduciaries under the corporate RIA.

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

 

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Interesting Angles on the DOL’s Fiduciary Rule #39


DOL, fiduciary, General

FINRA Regulatory Notice 13-45: Guidance on Distributions and Rollovers

This is my 39th 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 and related developments in the securities laws.

Even though the DOL fiduciary rule is being delayed, other regulators have indicated their interests in protecting participants from inappropriate recommendations to take plan distributions and roll over to IRAs.

FINRA, which oversees broker-dealers, addressed rollover recommendations to participants in Regulatory Notice 13-45. In describing the purpose of the notice, FINRA said:

“FINRA is issuing this Notice to remind firms of their responsibilities when (1) recommending a rollover or transfer of assets in an employer-sponsored retirement plan to an Individual Retirement Account (IRA) or (2) marketing IRAs and associated services.”

FINRA noted that:

“A broker-dealer’s recommendation that an investor roll over retirement plan assets to an IRA typically involves securities recommendations subject to FINRA rules. . . . Any recommendation to sell, purchase or hold securities must be suitable for the customer and the information that investors receive must be fair, balanced and not misleading.”

FINRA went on to say that:

“A recommendation concerning the type of retirement account in which a customer should hold his retirement investments typically involves a recommended securities transaction, and thus is subject to Rule 2111. For example, a firm may recommend that an investor sell his plan assets and roll over the cash proceeds into an IRA. Recommendations to sell securities in the plan or to purchase securities for a newly opened IRA are subject to Rule 2111.”

In essence, FINRA concludes that a recommendation to take a rollover includes a recommendation to liquidate* the investments in a participant’s 401(k) account. . . and that the liquidation recommendation is a “recommended securities transaction” and “thus is subject to Rule 2111.” The guidance then goes on to say:

“If Rule 2111 is triggered, a registered representative must have a reasonable basis to believe that the recommendation is suitable for the customer, based on information about the options obtained through reasonable diligence, and taking into account factors such as tax implications, legal ramifications, and differences in services, fees and expenses between the retirement savings alternatives.” (Emphasis added.)

Earlier in the Notice FINRA also describes the need for an adviser to compare investments, services and expenses in the plan and the recommended IRA before making a recommendation.

That is strikingly similar to the Best Interest Contract Exemption (BICE) requirement that fiduciary advisers must do a comparative analysis of the investments, services and expenses in the Plan and the proposed IRA before recommending a rollover.

The regulators appear to be harmonizing around the type of analysis and investigation required to make a suitable or prudent recommendation.

*In a footnote, FINRA observes that it is possible that a plan could permit distributions in kind, rather than requiring liquidation of the plan’s designated investment alternatives. As a practical matter, I have not worked with any 401(k) plans that distribute in kind. I assume that my experience is typical and that few, if any, 401(k) plans permit distributions of their mutual fund shares.

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

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DOL Proposes Delay of Fiduciary Rule Applicability Date


DOL

The Department of Labor (DOL) published a proposed rule to delay the applicability date of the fiduciary rule from April 10 to June 9. The proposal for the delay will still need to go through a regulatory process, including a 15 day comment period; however we expect that the DOL will make the delay effective immediately upon the final regulation’s publication to the Federal Register. The DOL also announced a 45 day comment period on policy issues raised in the February 3 Presidential Memorandum. There are three possible outcomes at the end of the 45 day comment period. In this Alert, we discuss the regulatory process and when the delay might actually go into effect, as well as the possible outcomes at the end of the 45 day period.

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Interesting Angles on the DOL’s Fiduciary Rule #38


broker-dealers, DOL, registered investment advisers, SEC

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 obligations when: (i) selecting the type of account; (ii) performing due diligence on investment options; (iii) making initial investment recommendations; and (iv) providing on-going account management.”

At the end of the language about “selecting the type of account,” the SEC included a footnote that referenced FINRA guidance on rollovers to IRAs. That footnote said:

“See FINRA, Rollovers to Individual Retirement Accounts, Regulatory Notice 13-45 (December 2013) (FINRA Regulatory Notice 13-45) (“A recommendation concerning the type of retirement account in which a customer should hold his retirement investments typically involves a recommended securities transaction, and thus is subject to Rule 2111. For example, a firm may recommend that an investor sell his plan assets and roll over the cash proceeds into an IRA. Recommendations to sell securities in the plan or to purchase securities for a newly-opened IRA are subject to Rule 2111.”)”

Combining the language in the Risk Alert with the language in the footnote, the OCIE is saying that recommendations to participants to take distributions from plans (that is, from one type of account), and rolling over to an IRA (that is, to another type of account) will be scrutinized. It also suggests that the OCIE favorably views FINRA’s analysis in Regulatory Analysis 13-45.

In my next post, I will discuss the rollover discussion in FINRA Regulatory Notice 13-45.

For the moment, though, as a word to the wise, broker-dealers and RIAs should review their procedures and policies, as well as their supervisory programs, to ensure that their advisers are complying with the expectations of the OCIE and with the provisions of Regulatory Notice 13-45.

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

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Interesting Angles on the DOL’s Fiduciary Rule #37


DOL, fiduciary, prudent, SEC

SEC Retirement-Targeted Examinations

This is my 37th 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 and related developments in the securities laws.

In 2015, the Office of Compliance Inspections and Examinations (OCIE) of the SEC issued a National Exam Program Risk Alert describing its “Retirement-Targeted Industry Reviews and Examinations Initiative” (ReTIRE). The Initiative announces that the OCIE “will conduct examinations of SEC-registered investment advisers and broker-dealers (collectively, registrants) under the ReTIRE Initiative that will focus on certain high-risk areas of registrants’ sales, investment and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.”

In its Risk Alert, the OCIE says:

“The staff intends to use data analytics, information from prior examinations, and examiner-driven due diligence to identify registrants to examine under this Initiative. As part of the examinations or the selection of examination candidates, the staff may focus on the activities of investment advisory representatives and/or broker-dealer registered representatives (collectively, representatives). The risk-based examinations conducted under the ReTIRE Initiative will focus on the services offered by the registrants to investors with retirement accounts in the following areas:

Reasonable Basis for Recommendations. . . .

Conflicts of Interest. . . .

Supervision and Compliance Controls. . . .

Marketing and Disclosure. . . .”

The purpose of this post is to emphasize that there are agencies, in addition to the Department of Labor, that are focused on advisers’ practices for retirement investing and related activities (for example, the recommendation of rollovers). In future posts, I will discuss the OCIE’s focus for those examinations.

For the moment, though, a good approach is to make sure that recommendations regarding plan distributions and rollovers are in the best interest of the participants and that investment practices for IRAs should be consistent with prudent investing in retirement (and should reflect practices such as appropriate portfolio investing, diversification, and mitigation of conflicts of interest).

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

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Interesting Angles on the DOL’s Fiduciary Rule #36


DOL, fiduciary, SEC

Retirement Advice and the SEC

While the DOL’s fiduciary regulation and prohibited transaction exemptions have occupied everyone’s attention over the last year, other regulatory agencies have been focusing on retirement plan issues, as well.

For example, in its “Examination Priorities for 2017,” the SEC has indicated that it will focus on “Senior Investors and Retirement Investments.” Specifically, the SEC says:

As the U.S. population ages and investors become more dependent than ever on their own investments for retirement income, we are devoting increased attention to issues affecting senior investors and those investing for retirement.

  • ReTIRE. We will continue our multi-year ReTIRE initiative, focusing on investment advisers and broker-dealers along with the services they offer to investors with retirement accounts. This year, these examinations will likely focus on, among other things, registrants’ recommendations and sales of variable insurance products as well as the sales and management of target date funds. We will also assess controls surrounding cross-transactions, particularly with respect to fixed income securities.
  • Senior Investors. Today’s Americans are more reliant on returns from their investment portfolios to fund their retirement compared to previous generations. We will evaluate how firms manage their interactions with senior investors, including their ability to identify financial exploitation of seniors. Examinations will likely focus on registrants’ supervisory programs and controls relating to products and services directed at senior investors.

With regard to retirement investments, the most impactful “focus” will be on recommendations and sales of variable insurance products. In the context of individual retirement accounts and annuities, that refers to individual variable annuities. (Also see Retirement-Targeted Industry Reviews and Examinations Initiative, June 22, 2015. Note that the SEC references FINRA’s guidance on rollovers, Regulatory Notice 13-45.)

However, unlike the DOL, the SEC will not focus on the fiduciary process and prohibited transaction exemptions. Instead the SEC will examine for violations of rules that are, in some ways, similar to the fiduciary rule, such as the best interest of the investor, the suitability of the product for the investor’s needs, and disclosures. However, unlike the DOL rule, the securities laws do not include prohibited transactions.

With regard to senior investors, it’s important to keep in mind that the terms “Senior Investors,” “Retirees,” and “IRA Owners” are, in many cases, synonymous. For these investors, the SEC will focus on:

  • The ability of advisers to identify financial exploitation of seniors;
  • Registrants’ supervisory programs and controls related to products and services directed at senior investors.

In terms of qualified assets, this means that the SEC will be looking at the products and services recommended to retirees who are IRA owners. Are the services and products recommended to those IRAs suitable for retirees and were the recommendations in the best interest of the IRA owners? In my opinion, increasing attention will be given to the recommendations of particular investments and strategies to older investors. Those recommendations should be consistent with retirement investing, including appropriate asset allocation.

Forewarned is forearmed.

POSTSCRIPT: Some readers may think that, since this article is about SEC examinations, it is limited to registered investment advisers. However, when the SEC uses the term “registrants,” it is referring to the “more than 4,000 broker-dealers (including approximately 162,000 branch offices and 640,000 registered representatives), more than 12,000 investment advisers (with nearly $67 trillion in assets under management) . . .” (See footnote 2 in Examination Priorities for 2017.)

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

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Interesting Angles on the DOL’s Fiduciary Rule #35


DOL, fiduciary

Presidential Memorandum on Fiduciary Rule

Last Friday, the White House directed a memorandum to the DOL to review the fiduciary regulation and the related exemptions (the “fiduciary rules”).

This article discusses what the memo did and did not do, and what the next steps are.

As a legal matter, the memo was more “show” than “go,” in the sense that it did not delay, withdraw or modify the fiduciary rules. Instead, it directed the DOL to evaluate the rules and to determine if they should become applicable, be modified or be withdrawn.

Shortly after the memo was signed, the Acting Secretary of Labor said that the Department would look into possible legal actions to delay the application of the rule. While that clearly indicates a desire to delay the applicability date beyond April 10th, it also suggests that the DOL has not decided if there is a legal maneuver that could accomplish that result. On the other hand, it could just be government-speak indicating that a delaying action will be coming in the next few days. Either way, I’m a little surprised that the action wasn’t taken immediately.

If it is delayed, that leaves us with the questions of (1) what rules apply now, and (2) will the rules be withdrawn or modified (and, if modified, how)?

The answer to the first question is easy . . . the “old” fiduciary rules are in effect until something is done. The second question is not easily answered. There is a split of opinion about whether the DOL will kill or modify the rules. At this point, we need to wait and see.

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

 

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Interesting Angles on the DOL’s Fiduciary Rule #34


DOL, fiduciary, registered investment advisers

A Seminar Can Be a Fiduciary Act

This is my 34th 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.

Last week, the DOL issued its second set of FAQs on the fiduciary rule and conflict of interest exemptions. For the most part, the DOL’s answers were consistent with the industry’s understanding of the rules. However, a few were particularly interesting. For example, Question 17 asked:

Q17. Would a free dinner seminar offered by an investment adviser as a means of marketing services or investments to a group of retirees or individuals approaching retirement be a widely attended speech or conference within the meaning of the general communications provision of the Rule?

Before giving you the answer, let me explain the significance of the question. If the adviser’s comments at the meeting are considered to be “general communications,” then they are not fiduciary advice. Also, if the meeting is a “widely attended” speech or conference, the comments would be considered general and, therefore, not fiduciary advice. On the other hand, if the seminar is not considered to be “widely attended” and if the adviser’s comments “suggest” a particular course of investment action, then—probably unbeknownst to the adviser, the comments could be fiduciary investment advice. (Of course, to be fiduciary advice, the recommendation must ultimately also cause compensation to be paid to the adviser.)

The DOL answered:

The Department does not consider such free-meal seminars to be widely attended speeches or conferences within the meaning of the general communications provision. Moreover, in the Department’s view, a reasonable person attending such a seminar could view statements by the investment adviser as investment recommendations even if the statements were made to all the attendees. Whether the particular communications at the seminar could reasonably be viewed as a suggestion that the advice recipients engage in or refrain from taking a particular course of action (i.e., a recommendation) would be a matter of facts and circumstances.

In other words, in “free dinner seminars,” an adviser’s comments about investments, insurance products, advisory services, or investment strategies may be fiduciary advice. Forewarned is forearmed.

What if an adviser wants to minimize the risk of being a fiduciary at those meetings? In that case, the discussion would need to be about general market data and the adviser’s services. Keep in mind that, under the “hire me” discussion in the preamble to the fiduciary rule, an adviser can always recommend himself and his firm without becoming a fiduciary. However, the adviser cannot recommend specific products, strategies, etc., without becoming a fiduciary.

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

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Interesting Angles on the DOL’s Fiduciary Rule #33


BICE, DOL, fiduciary, registered investment advisers

Discretionary Management, Rollovers and BICE

This is my 33rd 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.

Most broker-dealers and RIA firms are familiar with the provisions of the Best Interest Contract Exemption (BICE) and with the fact that, as a general rule, BICE applies only to non-discretionary investment advice. But, that isn’t the end of the story. There are some situations in which discretionary management can be used for recommendations that are covered by BICE. For example, if a representative of a broker dealer or an RIA prudently recommends a distribution and IRA rollover (satisfying the Level Fee Fiduciary conditions), the IRA may be invested using discretionary investment manager. (Note, though, that the discretionary investment management must be provided by a “pure” Level Fee Fiduciary. That means that neither the adviser, the supervisory entity (e.g., the broker dealer or RIA firm), or any affiliated or related party can receive any compensation in addition to the level fee. Those prohibited additional forms of compensation would include, for example, investment management fees for proprietary investments, 12b-1 fees, or revenue sharing.)

The Department of Labor specifically addressed the issue of discretionary investment management for recommended rollovers in its recently issued FAQs — Frequently Asked Questions. Question and Answer 7 stated the following:

Q7. Is the BIC Exemption available for recommendations to roll over assets to an IRA to be managed on a going-forward basis by a discretionary investment manager?

Yes. As noted above, the BIC Exemption does not provide relief for a recommended transaction if the adviser has or exercises any discretionary authority or discretionary control with respect to the transaction. However, it does provide relief for investment advice to roll over a plan account into an IRA, even if the adviser or financial institution will subsequently serve as a discretionary investment manager with respect to the IRA, as long as the adviser does not have or exercise any discretionary authority or discretionary control with respect to the decision to roll over assets of the plan to an IRA, and the other applicable conditions of the exemption are satisfied.

The moral of this story is that the DOL’s fiduciary rule and exemptions are complex. As a result, the guidance should be studied closely, and it is not enough to rely on newspaper articles and speeches to make decisions. In our discussions with broker dealers, RIAs and individual advisers, we have found that there are a number of misconceptions about the rules, including that some people believe that BICE can never be used for discretionary investment management. Obviously, the DOL language quoted in this article debunks that perception.

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

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Inside the Beltway – January 26, 2017


DOL, fiduciary

Please join us for the nineteenth Inside the Beltway presentation, scheduled for January 26, 2017. This is the next session in an ongoing series of free audiocasts presented by Fred Reish and Brad Campbell, of Drinker Biddle & Reath, discussing developments in Washington that directly impact our industry. The presentation is sponsored by Natixis. Click on the linked title, above, to register.

During this session of Beltway we will discuss:

  • Update on the fiduciary rule
  • Update on the special Financial Institution status for IMOs and the sale of fixed indexed annuities
  • Impact of the Congressional proposals for retirement plans
  • Impact on retirement plans of other priorities of the Trump Administration

The audiocast will be recorded and available to all registrants within a week of the presentation. An Outlook appointment request will be sent with registration confirmation.

Questions? Please contact liz.jutila@dbr.com.

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