Category Archives: SEC

A Rollover Recommendation Is a Securities Recommendation


best interest, DOL, FINRA, rollovers, SEC

Key Takeaways

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

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

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

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Investment Advisers: The Independent Duties of Care and Loyalty


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Key Takeaways

  • Recent SEC guidance has clarified that the investment adviser duties of care and loyalty are separate, independent duties.
  • A reasonable interpretation of the SEC and Staff guidance is that the satisfaction of one will not satisfy the other–both must be individually satisfied.
  • As a result, the SEC appears to be saying that, even if a conflict is disclosed, that does not, in and of itself, satisfy the duty of care. For example, if an adviser discloses that the adviser will receive compensation related to an investment decision or recommendation, e.g., revenue sharing, but the revenue sharing share class of a mutual fund is more expensive for the investor, the duty of care may be violated even though the duty of loyalty was satisfied.

There appear to be conflicting views of whether an investment adviser’s duty of care can be satisfied by disclosures that satisfy the duty of loyalty. That is, if an adviser discloses the receipt of additional compensation from investments or service providers, can the adviser then recommend or select that investment even though it may be more expensive for the client?  In recent years, the SEC has issued guidance that seems to answer that question…and the answer appears to be “no.” Based on its 2019 Commission Interpretation Regarding Standard of Conduct for Investment Advisers, and the two 2022 SEC Staff Bulletins, the position of the SEC (and of the Staff) is that the duties of care and loyalty (together referred to as the duty to act in the best interest of investors) are separate and distinct, and that they each must be independently satisfied.

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Best Interest Standard of Care for Advisors #92: Consideration of Costs in the Evaluation of Rollovers


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, rollovers, SEC
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Key Takeaways

The DOL’s expanded definition of fiduciary advice is described in the preamble to PTE 2020-02. The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied.

In both its Regulation Best Interest (Reg BI) for broker-dealers and Interpretation Regarding Standard of Conduct for Investment Advisers (Investment Adviser Interpretation), the SEC said that rollover recommendations were subject to its best interest standard of care, which is similar to the DOL’s fiduciary and loyalty standards.

Both the DOL and the SEC also say that cost is a material consideration in evaluating rollovers. This article discusses that guidance.

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 (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.

Under these standards, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 can provide relief, but only if all of its conditions are met.

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Best Interest Standard of Care for Advisors #91: Rollover Recommendations to Participants in Government Plans


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, registered investment advisers, rollovers, SEC
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Key Takeaways

The DOL’s expanded definition of fiduciary advice is described in the preamble to PTE 2020-02. The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied.

However, the DOL’s guidance in the PTE does not apply to rollover recommendations to participants in government plans.

Rollover recommendations by broker-dealers and investment advisers to participants in government retirement plans are regulated by the SEC. Stated slightly differently, the SEC regulates rollover recommendations by broker-dealers and investment advisers to both private sector and government plan participants.

This article discusses the SEC regulation of rollover recommendations.

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 (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.

Under these standards, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 will provide relief, but only if all of its conditions are met.

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Best Interest Standard of Care for Advisors #89: Rollovers and the Information That Is Needed About the Participant


2020-02, best interest, DOL, IRA, rollovers, SEC
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Key Takeaways

The DOL’s expanded definition of fiduciary advice was described in the preamble to PTE 2020-02.

The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied

One of the conditions for relief is that a recommendation be in the best interest of a retirement investor (e.g., retirement plan, participant in a plan, or an IRA owner. A best interest process must consider the “investment objectives, risk tolerance, financial circumstances, and needs” of the retirement investor.

This article discusses the information needed about a participant in order to make a best interest rollover recommendation.

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 (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.

The fiduciary regulations under ERISA and the Internal Revenue Code have two definitions of fiduciary advice. The first is the obvious—where the investment professional and financial institution have discretion over the investments in retirement accounts. In effect, that is a one-part test—“discretion.” In addition, there is a 5-part test for non-discretionary fiduciary advice. The DOL did not amend the regulation to modify any of the “parts,” but instead reinterpreted some of the parts, and particularly the “regular basis” part, to significantly increase the number of investment professionals and financial institutions who are fiduciaries.

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Best Interest Standard of Care for Advisors #88: Specific Reasons for Rollover Recommendations That Won’t Work (Part 2)


2020-02, best interest, DOL, IRA, rollovers, SEC
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Key Takeaways

The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice, particularly for rollover recommendations.

The DOL’s expanded definition of fiduciary advice was described in the preamble to PTE 2020-02.

The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied.

This article discusses the requirement to give participants the specific reasons why the rollover recommendation is in their best interest (beginning July 1, 2022) and reasons that won’t work.

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 (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.

The fiduciary regulations under ERISA and the Internal Revenue Code have two definitions of fiduciary advice. The first is the obvious—where the investment professional and financial institution have discretion over the investments in retirement accounts. In effect, that is a one-part test—“discretion.” In addition, there is a 5-part test for non-discretionary fiduciary advice. The DOL did not amend the regulation to modify any of the “parts,” but instead reinterpreted some of the parts, and particularly the “regular basis” part, to significantly increase the number of investment professionals and financial institutions who are fiduciaries.

This article focuses on the requirement in PTE 2020-02 that financial institutions and investment professionals provide participants with the “specific reasons” why a rollover recommendation is in the best interest of the participant.

Continue reading Best Interest Standard of Care for Advisors #88: Specific Reasons for Rollover Recommendations That Won’t Work (Part 2) →

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Best Interest Standard of Care for Advisors #87: Specific Reasons for Rollover Recommendations That Won’t Work (Part 1)


2020-02, best interest, DOL, IRA, rollovers, SEC
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Key Takeaways

The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice, particularly for rollover recommendations.

The DOL’s expanded definition of fiduciary advice was described in the preamble to PTE 2020-02.

The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied.

This article discusses the requirement to give participants the specific reasons why the rollover recommendation is in their best interest (beginning July 1, 2022) and reasons that won’t work.

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 (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.

The fiduciary regulations under ERISA and the Internal Revenue Code have two definitions of fiduciary advice. The first is the obvious—where the investment professional and financial institution have discretion over the investments in retirement accounts. In effect, that is a one-part test—“discretion.” In addition, there is a 5-part test for non-discretionary fiduciary advice. The DOL did not amend the regulation to modify any of the “parts,” but instead reinterpreted some of the parts, and particularly the “regular basis” part, to significantly increase the number of investment professionals and financial institutions who are fiduciaries.

Continue reading Best Interest Standard of Care for Advisors #87: Specific Reasons for Rollover Recommendations That Won’t Work (Part 1) →

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Best Interest Standard of Care for Advisors #78: Compliance with PTE 2020-02: Mitigation of Incentive Effects of Payout Grids (Part 2)


2020-02, best interest, DOL, fiduciary, SEC
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The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs

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 #78: Compliance with PTE 2020-02: Mitigation of Incentive Effects of Payout Grids (Part 2) →

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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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