Category Archives: reg BI

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


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

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


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

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The New Fiduciary Rule (52): The Loper Bright Decision and What it Means for DOL Exemptions (2)


2020-02, 84-24, DOL, fiduciary, prohibited transaction, reg BI
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Key Takeaways

  • The lawsuits against the DOL’s new regulation on fiduciary advice and the related exemptions—and the likely appeals—will probably last for years.
  • Two key issues in the lawsuits and appeals are whether the DOL has the authority to amend its existing regulation—the 5-part test—to cover one-time recommendations and whether the DOL has the authority to issue prohibited transaction exemptions that require a standard of care (e.g., prudence and loyalty) where the law does not otherwise.
  • The DOL will argue that circumstances have change since 1975, for example, the enactment of Code section 401(k) and the post-ERISA growth in the importance of those plans. As a part of that, the DOL asserts that rollover recommendations should be fiduciary advice and that the compensation from the rollover IRA (account or annuity) would be a prohibited transaction.
  • My last post, Fiduciary Rule 51, discussed the impact of the Supreme Court’s Loper Bright decision on the new fiduciary regulation. This post discusses the impact of Loper Bright on the validity of the amended PTEs, 84-24 and 2020-02.

As I explained in my last post, Fiduciary Rule 51, I have been asked whether the Supreme Court’s decision in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce et al. could affect the outcome of the litigation about the validity of the DOL’s fiduciary regulation and related exemptions. The answer is “yes,” but perhaps not in the way you might think. This article discusses the Loper Bright decision in the context of a review of the DOL’s Prohibited Transaction Exemptions (PTEs) 84-24 and 2020-02.

To be fair, I am not an expert on constitutional law and I don’t want to create the impression that this is an authoritative article. Instead, my goal is to highlight the issues for consideration by the courts.

Continue reading The New Fiduciary Rule (52): The Loper Bright Decision and What it Means for DOL Exemptions (2) →

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The New Fiduciary Rule (51): The Loper Bright Decision and What it Means for DOL Regulations (1)


DOL, fiduciary, reg BI
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Key Takeaways

  • The lawsuits against the DOL’s new regulation on fiduciary advice and the related exemptions—and the likely appeals—will probably last for years.
  • A key issue in the lawsuits and appeals is the authority of the DOL to amend its existing regulation—the 5-part test—to cover one-time recommendations (subject to specified limits).
  • The DOL will argue that circumstances have change since 1975, for example, the enactment of Code section 401(k) and the post-ERISA growth in the importance of those plans. As a part of that, the DOL asserts that rollover recommendations should be fiduciary advice.
  • On the other hand, some financial industries, and particularly the insurance industry, will argue that a one-time recommendation associated with a rollover is a sales transaction that should not be held to a fiduciary standard.
  • A critical question for the courts is whether the DOL has authority to issue a new fiduciary recommendation that, among other things, says that a rollover recommendation, explicit or implicit, is fiduciary advice. The Supreme Court’s decision in the Loper Bright case establishes the standard for the courts to evaluate an agency’s authority.

I have been asked whether the Supreme Court’s decision in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce et al. could affect the outcome of the litigation about the validity of the DOL’s fiduciary regulation and related exemptions. The answer is “yes”, but perhaps not in the way you might think. This article discusses the Loper Bright decision in the context of a review of the DOL’s fiduciary regulation.

To be fair, I am not an expert on constitutional law and I don’t want to create the impression that this is an authoritative article. Instead, my goal is to highlight the issues for consideration by the courts.

Continue reading The New Fiduciary Rule (51): The Loper Bright Decision and What it Means for DOL Regulations (1) →

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


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

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


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

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


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

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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) →

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Best Interest Standard of Care for Advisors #77: Compliance with PTE 2020-02: Mitigation of Incentive Effects of Payout Grids (Part 1)


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, reg BI, SEC
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The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs

This series focuses on the DOL’s new fiduciary “rule”. This, and the next several, articles look at the Frequently Asked Questions (FAQs) issued by the DOL to explain the fiduciary definition and the exemption for conflicts of interest.

Key Takeaways

  • The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
  • In FAQ 17, the DOL discusses both the implications of payout grids and mitigation techniques to minimize compliance risks.
  • The general mitigation requirement is that financial institutions—such as broker-dealers and investment advisers–mitigate conflicts of interest “to the extent that a reasonable person reviewing the policies and procedures and incentives as a whole would conclude that they do not create an incentive for the firm or the investment professional to place their interests ahead of the interest of the retirement investor”.

Background

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 (“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.

Continue reading Best Interest Standard of Care for Advisors #77: Compliance with PTE 2020-02: Mitigation of Incentive Effects of Payout Grids (Part 1) →

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Best Interest Standard of Care for Advisors #76: Compliance with PTE 2020-02: Mitigation of Conflicts (Part 3)


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, reg BI, SEC
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The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs

This series focuses on the DOL’s new fiduciary “rule”, which was effective on February 16. This, and the next several, articles look at the Frequently Asked Questions (FAQs) issued by the DOL to explain the fiduciary definition and the exemption for conflicts of interest.

Key Takeaways

  • The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
  • In FAQ 16, the DOL discusses the requirements to have policies and procedures to mitigate conflicts of interest. The mitigation requirement applies to conflicts both at the firm level and at the investment professional level.
  • The requirement is that the policies and procedures mitigate conflicts of interest “to the extent that a reasonable person reviewing the policies and procedures and incentives as a whole would conclude that they do not create an incentive for the firm or the investment professional to place their interests ahead of the interest of the retirement investor”.
  • Best Interest #74 (Part 1) discussed the general requirements under FAQ 16 to mitigate conflicts of interest of both the financial institution and the investment professional. Best Interest #75 (Part 2) looked at mitigation of conflicts of investment professional. This post discusses the mitigation of conflicts for the financial institutions, including broker-dealers, investment advisers, insurance companies and banks and trust companies.

Background

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 (“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.

Continue reading Best Interest Standard of Care for Advisors #76: Compliance with PTE 2020-02: Mitigation of Conflicts (Part 3) →

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