Tag Archives: disclosures

The SEC’s 2024 Examination Priorities: Impact on IRAs and Retirement Plans

Key Takeaways

  • The SEC Division of Examinations is focused on advice to older investors and retirement investors. Advisors and their firms should review their practices for those investors.
  • Among the concerns of the Division of Examinations is whether conflicts are adequately disclosed so that investors can provide informed consent. Off-the-shelf disclosures may not have sufficient information to pass that test.
  • The starting point for making an investment recommendation or providing investment advice is to develop a profile of the investor that considers the information relevant to the investor’s needs and circumstances. The information needed for the profile for retired investors may be different than for accumulation investors. Questionnaires and other information gathering materials should be reviewed to ensure their adequacy for purposes of investors who will regularly withdraw cash for lifelong retirement income from their accounts.

The SEC Division of Examinations recently released its 2024 Examination Priorities (2024-exam-priorities.pdf (sec.gov)). While the Priorities cover a range issues, this article focuses on the Priorities that could impact advice and recommendations by investment advisers and dual registrants (both referred to as advisors in this article)  to  retirement investors. “Retirement Investors” is DOL terminology for investors in retirement plans and IRAs. My interchangeable use of SEC and DOL language is justified by their shared interest in protecting people who are saving and investing for retirement and who are investing and spending in retirement.

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Discretionary Management of IRAs: Conflicts and Prohibited Transactions

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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Investment Advisers: The Independent Duties of Care and Loyalty

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 #64: Compliance with PTE 2020-02: Disclosure of Conflicts of Interest

The DOL “Fiduciary Rule,” FAQ 14: Disclosure of Conflicts of Interest

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 FAQs generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
  • FAQ 14 explains that, to obtain the relief provided by the PTE, financial institutions must disclose to “retirement investors” the conflicts of interest related to any recommendations.
  • The Impartial Conduct Standards, which do not require disclosure of conflicts, must be satisfied from February 16, 2021 until December 20, 2021 under the DOL’s non-enforcement policy (with concurrence by the IRS), and then on December 21, all of the conditions of PTE 2020-02 must be satisfied, including the disclosure of conflicts.

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 retirement plans, participants 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 will be fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

In April, the DOL issued FAQs that explain the fiduciary interpretation and the conditions of the exemption.

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Best Interest Standard of Care for Advisors #20

Regulation Best Interest: Rollover Recommendations and Form CRS/ADV Part 3 Disclosures (Rollovers Part 6)

The SEC has issued its final Regulation Best Interest (Reg BI), Form CRS Rule, RIA Interpretation and Solely Incidental Interpretation. I am discussing the SEC’s guidance in a series of articles entitled “Best Interest Standard of Care for Advisors.”


This is the 6th of my series of articles about rollover recommendations and rollover education under the SEC’s Regulation Best Interest and its Interpretation for Investment Advisers. (For the first five, see Best Interest for Advisors #’s 15, 16, 17, 18, and 19.)

This article continues the discussion of the disclosure requirements related to rollover recommendations by broker-dealers and investment advisers, but moves from the discussion in Best Interest for Advisors #19 about the disclosure requirements in Reg BI and the RIA Interpretation to the requirements in the new Form CRS Rule (which must be satisfied beginning June 30, 2020).

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Best Interest Standard of Care for Advisors #19

Regulation Best Interest: Rollover Recommendations for Investment Advisers (Rollovers Part 5)

The SEC has issued its final Regulation Best Interest (Reg BI), Form CRS Rule, RIA Interpretation and Solely Incidental Interpretation. I am discussing the SEC’s guidance in a series of articles entitled “Best Interest Standard of Care for Advisors.”


This is the 5th of my series of articles about rollover recommendations and education under the SEC’s Regulation Best Interest and its Interpretation for Investment Advisers. (For the first four, see Best Interest for Advisors #’s 15, 16, 17 and 18.)

This article discusses the disclosure requirements for conflicts of interest involved in rollover recommendations by broker-dealers and investment advisers. Let’s start by pointing out why a rollover recommendation is a conflict of interest.

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