Tag Archives: conflict

The New Fiduciary Rule (1): An Overview


2020-02, 84-24, DOL, fiduciary, IRA, rollovers
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The US Department of Labor has 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.

Key Takeaways

  • One time investment recommendations to qualified and ERISA retirement plans and their participants, and to IRA owners, can be fiduciary advice. Plans, participants and IRA owners are referred to as “retirement investors”.
  • A rollover recommendation is one-time advice that will result in fiduciary status.
  • Fiduciary recommendations that result in compensation to a securities adviser (that is, to an investment adviser or broker-dealer) or to an insurance agent will be prohibited conflicts of interest, necessitating satisfaction of the conditions in a prohibited transaction exemption.

This blog post is an overview of the new proposals. Follow up posts will go into detail on each of the proposals.

The proposed fiduciary regulation—called the “Retirement Security Rule”–defines fiduciary advice as follows:

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Discretionary Management of IRAs: Conflicts and Prohibited Transactions


DOL, IRA, prohibited transaction
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Key Takeaways

  • Where an investment adviser charges different fees for managing fixed income in a portfolio than for managing equities, and has discretion to determine the allocation between the two in an IRA, the investment adviser has control over its fees, which appears to violate a prohibited transaction provision in the Internal Revenue Code.
  • The inadvertent violation can be corrected, going forward, by using a blended rate where both allocations are charged the same fee. In other words, there would just be an account fee and not a fee that varied by allocations that are within the control of the investment adviser.
  • There are other potential solutions, including transitioning the allocations to nondiscretionary advice.

Discussion

Both the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) include prohibited transaction provisions that literally prohibit certain transactions (unless exempted by statute or by a prohibited transaction exemption). ERISA-governed qualified retirement plans are subject to both ERISA and Code prohibitions. However, standalone IRAs are only subject to the Code prohibitions. In that regard, Code sections 4975(c)(1)(E) and (F) provide:

(c) Prohibited transaction

(1) General rule

For purposes of this section, the term “prohibited transaction” means any direct or indirect—

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(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

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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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