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NSCP Currents OCTOBER 2017 SPECIAL REPRINT
FOR COMPLIANCE. BY COMPLIANCE.
CURRENTS
Rollover Advice Under ERISA: New Fiduciary Rule Impacts to Business & Compliance By Jeannie Lewis, Jason Roberts and Steve Niehoff
The information in this article is accurate as of September 2017. At the request of the Trump Administration, the Department of Labor is currently reviewing the impact of the new definition of investment advice, which became applicable on June 9, 2017, and affected prohibited transaction exemptions. Among the considerations for the Department is a delay in the full compliance requirements from January 1, 2018 to July 1, 2019. Along with the potential delay, there could be additional changes to the rule following the Department’s review. In addition, the U.S. Securities and Exchange Commission is soliciting comments on standards of conduct for investment advisers and broker-dealers when providing investment advice to retail investors. “To rollover, or not to rollover: that is the question.” With apologies to Hamlet, receiving compensation “in connection with” or “as a result of” answering that question for a client or a prospect now makes an advisor and his/her supervising firm a “fiduciary” under the Department of Labor’s (“DOL”) Conflict of Interest Rule and related Prohibited Transaction Exemptions (collectively, the “Fiduciary Rule”)1 Under the expanded definition of investment advice, which became “applicable” on June 9, 2017, advisors who provide recommendations to distribute or transfer assets from an employee benefit plan (“Plan”) or individual retirement account (“IRA”) are fiduciaries for purposes of the Employee Retirement Income Security Act (“ERISA”) and/or the Internal Revenue Code (“Code”). While fiduciary status creates new challenges, it does not have to paralyze advisors, supervisors, or compliance professionals to the point of inaction.
About the Authors Jeannie Lewis is Senior Compliance Counsel at William Blair & Company, L.L.C./William Blair Investment Management, LLC, www.williamblair.com, She can be reached at
[email protected]. Jason Roberts is CEO of Pension Resource Institute, and Partner at Retirement Law Group. www.pension-resources. com, www.retirementlawgroup.com. He can be reached at
[email protected]. Steve Niehoff is COO at Pension Resource Institute www.pension-resources.com. He can be reached at
[email protected]. 1. Employee Benefits Security Administration, Department of Labor: Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice; 81 Fed. Reg. 20946 (April 8, 2016) (codified at 29 C.F.R. Pts. 2509, 2510, and 2550).
This article discusses the application of the Fiduciary Rule specifically regarding advice to: i) rollover assets from a Plan to an IRA; or ii) rollover assets from a Plan to a new Plan. For brevity, we refer to these transactions as “rollovers,” as the processes recommended below apply equally to both types of advice. The term “client” refers to both existing and prospective clients or what the Fiduciary Rule considers a “retirement investor.”
Fiduciary status under ERISA It is important to note that fiduciary status under ERISA is quite different than the duties imposed upon registered investment advisers (“RIAs”) under the Investment Advisers Act of 1940 (“Act”). While the Act has been interpreted to apply a fiduciary standard of care,2 it allows RIAs to disclose material conflicts of interest to clients prior to delivering investment advice; ERISA, by contrast, considers such conflicts to be Prohibited Transactions (“PTs”) that cannot be “cured” by disclosure alone. Indeed, courts have described ERISA’s fiduciary duties as “the highest known to the law.”3 Among other requirements, ERISA fiduciaries must act prudently, and they owe Plan participants (and beneficiaries) a duty of undivided loyalty.4 Regarding the duty of prudence under ERISA, a fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”5 Fiduciaries must also give “appropriate consideration” to the facts and circumstances that the fiduciary knows or should know are relevant to the particular investment, including the role that the investment plays in that portion of the investment portfolio with respect to which the fiduciary has investment duties. Fiduciaries must then act in accordance with the conclusions that were reached after the appropriate consideration.6 Regarding the duty of loyalty, ERISA fiduciaries must discharge their duties solely in the interest of the participants and beneficiaries for the “exclusive purpose” of providing benefits to participants and their fiduciaries and defraying reasonable 2. See SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963). 3. See e.g., Donovan v. Bierwirth, 680 F.2d 263 (2nd Cir. 1982), cert denied, 459 U.S. 1069 (1982). 4. ERISA section 404; Employee Benefits Sec. Admin., Department of Labor, Meeting Your Fiduciary Responsibilities (May, 2004) available at http://www.dol.gov/ebsa/publications/fiduciaryresponsibility. html. 5. See ERISA section 404(a)(1)(B). 6. See 29 C.F.R. §2550.404a-1(b)(1). “Appropriate consideration” is defined as “a determination that the particular investment or investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the Plan portfolio with respect to which the fiduciary has investment duties), to further the purposes of the Plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action.” See 29 C.F.R. §2550.404a-1(b)(2).
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NSCP Currents expenses of the Plan. Under this standard, a fiduciary who received additional compensation and/or third-party payments (i.e., commissions, 12b-1, trail or solicitor fees) in connection with or as a result of providing investment advice (or exercising discretion over Plan investments) would breach his/her fiduciary duty to act “solely in the interest” of the client. It would also be considered a PT under ERISA and would subject the advisor and his/her supervising firm to substantial penalties, including, but not limited to: disgorgement, restitution, rescission, and excise taxes. An ERISA fiduciary can even be held personally liable for losses caused by a breach of duty.
Prohibited Transactions under ERISA
New Prohibited Transaction Exemptions for Rollovers
Because the DOL recognizes that advisors could not provide advice for free and stay in business, and that clients require professional assistance, particularly when making decisions about potential distributions, including IRA rollovers from their Plans, it created a new PTE, the Best Interest Contract (i) Dealing with assets of the Plan in his/her own interest or Exemption (“BICE”), to permit receipt of otherwise prohibited8 compensation, provided that certain conditions are satisfied. own account (a.k.a. “self-dealing”); ERISA section 406(b) prohibits fiduciaries from engaging in certain transactions regardless of their intent or the outcome of the transaction. Specifically, ERISA 406(b) prohibits fiduciaries from:
In the context of a rollover, if the advice is followed, both the (ii) Acting on behalf of or representing a party dealing with advisor and his/her supervising firm earn fees that would not the Plan in a transaction involving the assets of the Plan have been received if the assets had remained in the Plan. (a.k.a. “dual-representation”); and/or To avoid a PT, the BICE requires the advice to be in the “best interest” of the client.9 According to the DOL, such advice, (iii) Receiving any consideration for his/her own personal at the time of the recommendation, must be based on the account from any party dealing with the Plan regarding investment objectives, risk tolerance, financial circumstances, a transaction involving the assets of the Plan (a.k.a. the and needs of the client, without regard to the financial or other “anti-kickback rule”). interests of the advisor, supervising firm or any affiliate, related entity, or other party. The best interest standard, therefore, In the context of rollovers, the two most common PTs are selfreflects both the duty of prudence and loyalty. With respect dealing and the anti-kickback rule. Self-dealing would occur to the latter, the BICE recognizes that the advisor’s financial if the advisor stood to gain financially if the client accepts his/ interest in the transaction precludes him/her from acting solely her fiduciary advice to rollover – even if the advisor simply in the interest of the client. receives a fully-disclosed, asset-based or flat fee that would not vary based upon the advice he/she provides. It is the For fiduciary recommendations made on or after June difference in compensation paid to the advisor (and/or his/ 9, 2017, the new and amended PTEs, including the BICE, her supervising firm or affiliate(s)) that is relevant to the PT require otherwise conflicted advice to adhere to the Impartial analysis. If there is any additional compensation at issue Conduct Standards. During the “transition period,” currently based upon whether the client was to remain invested in his/ the period from June 9 to December 31, 2017, compliance her existing Plan versus that which would be received if the with the Impartial Conduct Standards is necessary to satisfy client was to rollover to an IRA or new Plan, then a PT would the conditions of the BICE. Other compliance requirements 7 result. Similarly, if the recommendation to rollover Plan assets for the BICE are currently scheduled to take effect on leads to the receipt of any third-party payments by the advisor, January 1, 2018; however, given the DOL’s ongoing review his/her supervising firm, or any affiliate(s) (i.e., commissions, of the Fiduciary Rule, there could be further changes to the 12b-1, trail or solicitor fees), then the advice would trigger the requirements and/or the effective date.10 anti-kickback rule leading to a PT. In addition to the requirement to provide advice that is in the Simplified PT Analysis client’s best interest, there are two other items that comprise the Impartial Conduct Standards: We recommend using a two-part test to determine if the advice to roll over will result in a PT: 1. Is the advisor providing fiduciary investment advice? 2. If so, will the advisor, supervising firm or any affiliate(s) receive an increase in compensation or a third-party payment as a result of the client accepting such advice? If the answer to either question is “no,” there is not a PT, and no further discussion is required. Typically, only if the answer to both questions is “yes,” will there be a PT. It may be possible, however, to restructure a transaction to avoid a PT while still permitting receipt of compensation. An example would be using any third-party payments to offset the advisor’s fees dollar-for-dollar. This “fee offset” would eliminate the conflict associated with the fiduciary recommendation. 7. In the context of a Plan-to-Plan rollover, it is important to note that the advisor may only stand to benefit from the recommended transaction if he/she is an advisor to the new Plan.
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1. The advisor, supervising firm, its affiliates, and any related entities cannot receive total fees in excess of reasonable compensation; and 8. Employee Benefits Security Administration, Department of Labor: Best Interest Contract Exemption; 81 Fed. Reg. 21002 (April 8, 2016) (codified at 29 C.F.R. Pt. 2550). Other PTEs that could apply to rollover advice include PTE 84-24 (permitting receipt of commissions in connection with recommending fixed rate annuities) and PTE 16-02 (a.k.a. the Principal Transaction Exemption). These PTEs, however, are beyond the scope of this article. 9. There are two versions of the BICE: i) the Level Fee Fiduciary BICE is available for advisor whose sole source of compensation is limited to a level, asset-based or fixed fee that does not vary based upon the investments recommended in the new Plan or IRA; and ii) the full BICE for all other otherwise prohibited compensation that would be received as a result of, or in connection with, the reinvestment of the proceeds of the distribution in the new Plan or IRA. One of the key differences is that the Level Fee Fiduciary BICE does not require a written agreement between the supervising firm and the client (as required under the full BICE when providing advice to roll over Plan assets to an IRA), nor does the advisor/supervising firm have to provide web- or transaction-based disclosures in order to comply with the PTE. 10.In July 2017, the DOL filed a brief in a Minnesota court stating they would propose delaying the full compliance requirements for the BICE from January 1, 2018 to July 1, 2019. As of this writing, the transition period has not been extended beyond January 1, 2018.
NSCP Currents 2. The advisor and supervising firm make no misleading statements about the investment transaction, compensation, and conflicts of interest. Regarding “reasonable compensation,” the DOL did not provide a black-letter definition in the BICE; however, reviewing DOL guidance on other topics, we recommend the following process: • Consider how well the proposed services align with the goals and objectives of the client; • Determine the value of the nature, scope, and frequency of services; and • Consider the experience and credentials of the advisor providing the fiduciary recommendation. Candidates for rollovers are not unlike the general population: they have varied goals, objectives, needs, risk tolerances, and service expectations. When acting as fiduciaries under ERISA, advisors must align their recommendations to the goals and objectives of each client. Advisors who recommend the same services or transactions to a wide range of clients may have more difficulty defending their recommendations. Additionally, if all clients do not need the same service, then it is reasonable for the nature, scope, and frequency of services to differ from one client to the next. Charging all clients the same amount for differing levels of service will make defending the reasonableness of compensation more difficult. Advisors and supervising firms will need to tailor their compensation to the amount of work required to serve each client (or category of client) appropriately, given the client’s particular needs. One of the potentially overlooked aspects of reasonable compensation is the experience and credentials of the advisor. Our industry rewards longevity, and it is reasonable for advisors whom have demonstrated success over many years, through many market cycles and/or have taken time to attain credentials such as the CFP or CFA to charge more than those who have not yet achieved the same level of experience and expertise. Regarding the potential for misleading statements, advisors and supervising firms should be transparent in their disclosures about all sources of revenues. Firms may want to consider a review of disclosures made in all marketing materials, contracts, and Form ADV for consistency not only between the various documents, but with what is verbally stated to clients to mitigate the risk of making a misleading statement.
Can advisors still “educate” under ERISA
The following table summarizes the types of communications that would be considered investment advice versus education in the context of rollovers. Advice = Recommendation(s) ... as to how securities/property should be invested after rolled over, transferred or distributed from a plan or IRA; or ... with respect to rollovers, transfers, or distributions from a plan or IRA, including whethe, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made... Eduction = Describing • terms or operation of the plan/IRA • benefitrs of plan/IRA participation or increasing plan/IRA contributions • retirement needs, impactthe of preretirement withdrawals or The followingincome table summarizes types of communications retirement varyinginvestment forms of distributions, including that would beincome, considered advice versus education rollovers, annuitization and other forms of lifetime income in the context of rollovers. payment options • advantages, disadvantages & risks of different forms of distributions, including rollovers • product features and fee/expensive information • investment alternatives available under the plan or IRA PROVIDED NO REFERENCES ARE MADE concerning the appropriateness of any individual investment or distribution option. ©2017 Pension Resource Institute - All rights reseved.
Supervising firms should carefully review all purported “general education” pieces to make sure that the context, in its entirety, does not offer investment advice or make a recommendation. If the supervising firm decides to develop a generalized rollover information form, for educational purposes only, it may want to require the client to sign a form acknowledging receipt of the information. Given the additional scrutiny that the DOL could apply to rollover transactions, supervising firms should consider distributing general education information about transfers, distributions, and rollovers to all clients and prospects, and maintain such documentation.
Best Practices for Best Interest™
Many advisors will have clients who simply wish to know their options, and the Fiduciary Rule provides a “carve-out” from the definition of investment advice for generalized investment education. To be considered non-fiduciary investment education, the information provided to the client should highlight issues for him/her to consider about the differences between remaining invested in his/her current Plan versus rolling over those assets to a new Plan or IRA, including, but not limited to:
When considering approaches to documenting the prudence of rollover advice, we recommend a three-step process to promote compliance with the Fiduciary Rule:
• • • • •
Information Gathering The good news about this step is that it may not differ significantly from your firm’s existing practices. Much, if not all, of the suggested demographic information is standard for a supervising financial institution to gather: age, target retirement date, employment status, investment experience
Taxes and penalties; Investment choices; Fees and expenses; Services provided and/or features offered; and Minimum distribution rules, ability to consolidate accounts and creditor protection.
1. Information gathering; 2. Analysis of options; and 3. Documenting the client’s file. Each step is discussed in greater detail below.
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NSCP Currents and risk tolerance, income, and net worth, current and expected liabilities, location and amount of other assets and needs of dependents. If there are other elements your financial institution is currently gathering, we recommend continuing to do so, as the goal is to get as much information about the client as necessary to understand his/her financial profile. Gathering information on the client’s objectives is likely something your advisors are already doing. The advisor should explore and understand: • The amount of desired accumulation or retirement income; and • Frequency of trading expected; desire for ongoing investment advice or discretionary management as well as other desired services such as wealth and/or legacy planning. In addition to gathering demographic information and discussing goals and objectives with the client, the advisor should ask for the following documents: their most recent Annual Participant Fee Disclosure Notice and Summary Plan Description11 as well as the client’s most recent four quarterly participant statements. This information will help the advisor understand the fees and expenses and services available in the Plan, and how they compare to what is being offered in the new Plan or IRA. One of the most difficult required points to compare is whether the employer pays any of the Plan’s administrative expenses on behalf of the client. The Annual Participant Fee Disclosure Notice may be the only place to find this information. The DOL’s fee disclosure regulation requires that employers separately list, in such disclosures, any administrative expenses that are not paid out of the operating expenses of the Plan’s investments. Some employers may elect to pay expenses such as plan-level investment advice, recordkeeping, and third-party administration from corporate assets (versus Plan assets). Because necessary expenses may be properly paid from Plan assets (provided they are reasonable), an employer may decide to stop paying such expenses from corporate assets and charge them back to Plan participant accounts. The fee disclosure regulation also requires any expenses charged directly to a Plan participant’s individual account to be disclosed no less frequently than quarterly along with a description of such charges. Consequently, requiring the advisor to obtain and analyze both the Annual Participant Fee Disclosure Notice as well as the client’s most recent quarterly statements may be the only way to ensure compliance with the requirements of the BICE. In addition to understanding fees and expenses, there are several other considerations that may influence the recommendation to stay in the Plan or to rollover. Among the factors the advisor should consider:
Required Analysis Once the advisor has gathered sufficient information about the client’s demographics, goals and objectives, and current Plan, he/she performs analysis to answer one of two questions: 1. Can the client’s goals be met within the Plan; or, 2. Are the client’s goals better met in a new Plan or IRA? To complete the analysis, the BICE requires the advisor to compare the following factors and retain documentation supporting his/her recommendation as being in the “best interest” of the client: 1. Investments available in the Plan versus the new Plan or IRA; 2. Services, which are relevant based upon the client’s objectives, offered through the Plan versus the new Plan or IRA; 3. Fees and expenses associated with participating in the Plan versus the new Plan or IRA; and 4. Whether the employer pays any of the Plan’s administrative expenses on behalf of the client. In addition to services and fees, the advisor should also consider whether the additional factors discussed earlier are available in either the Plan or IRA. For example, assume the advisor has a client concerned with outliving his/her retirement assets, and the Plan does not offer an annuity; the need for guaranteed income may be sufficient to tip the recommendation in favor of the IRA. It is important to note that costs are only one factor to consider; a prudent recommendation is not always lowest cost. If the client needs services not available in the current Plan and/or a new Plan, recommending an IRA rollover may be prudent, even if it results in higher fees. Advisors should weigh an IRA’s increased costs against the value to the client in terms of facilitating his/her retirement savings objectives. If the IRA represents greater benefit, the increase in fees may be justified. While increases in fees may be defensible, recall that one of the Impartial Conduct Standards is that the total fees are reasonable considering the value received by the client. Consequently, any analysis of the fees and expenses should compare the nature, scope and frequency of the services provided under both the Plan any potential new Plan and IRA and alignment with the client’s goals and objectives and industry averages for similar services.
Documenting the Client File There is an old adage in the compliance industry that if something is not documented, it’s as if it never happened. • The importance of consolidating accounts (performance Therefore, the supervising firm must put in place a process reporting considerations); to maintain not only the underlying supporting information • Access to penalty-free withdrawals; gathered from the client through conversations, completed • Delaying required minimum distributions (“RMDs”) and ease questionnaires/applications and Plan documentation, but also of RMDs if multiple sources; the advisor’s written analysis of whether a rollover is in the • Creditor protection; best interest of the client. • Range of distribution options; • Tax considerations (such as, Roth treatment, withdrawal There is not a “one-size fits all” solution for documenting the rates and/or employer stock); and analysis; however, supervising firms should consider tools to • Desirability of continued connection to former employer.12 help capture the rollover rationale. For example, some firms may design a proprietary tool, such as an excel worksheet or intake form, requiring the advisor to respond, in writing, 11.Employers are required to produce these for Participant-directed plans covered by ERISA. to a series of questions that ultimately support the advisor’s 12. This list is intended as illustrative not exhaustive; additional factors may be discovered in the information gathering step in the process.
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NSCP Currents recommendation regarding whether to recommend a rollover. To answer the questions, the advisors would be directed to information gathered through conversations, completed questionnaires and the Annual Participant Fee Disclosure, Summary Plan Description, and quarterly statements. Other supervising firms may hire outside vendors offering a solution tied to a financial planning, wealth management and a client relationship management platform. In the end, the documentation maintained in the supervising firms’ files should include client: demographics, objectives, Plan documentation and a written analysis regarding whether to rollover the assets and, if so, to what type of account (brokerage, non-discretionary advisory or discretionary advisory, insurance product, etc.). The documentation and written analysis should be maintained in accordance with the books and records requirements of the various regulators, including the DOL, the U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). To simplify documentation, we recommend the following in the client’s file:
Tips of Supervision and Compliance Because the standard of care for an ERISA fiduciary exceeds that of FINRA or the SEC, updating compliance and supervisory practices is paramount for supervising firms to mitigate risk adequately. Beyond a strong culture, the backbone of any successful compliance and supervisory framework is supervisory and compliance policies, procedures and processes tailored to the financial institution’s business. The next step is to train supervisors, advisors (and their assistants) and middle and back office staff not only on the written policies but also on the fundamentals of what it means to be a “fiduciary” under ERISA. As with any program, a fundamental component is testing that the policies are being followed and functioning within an organization. The penalties for breaching fiduciary responsibility under ERISA can be severe, including requiring advisors and supervising firms to disgorge revenues generated in connection with the transaction(s) where the breach occurred, as well as potential civil and criminal penalties. The stakes for supervising properly can be high, and developing sound supervisory practices is critical to protecting advisors and financial institutions. We recommend supervising firms update their supervisory practices to monitor performance against ERISA requirements.
• Information gathered in the “information-gathering” step: demographics, goals and objectives, and other Below is a series of questions to provide a general framework supplemental information or documentation; for supervising ERISA fiduciary activity: • Written analysis to address: – Whether to take a distribution from the Plan; 1. Is the advisor providing a fiduciary service? If “no,” no – The amount to distribute; further analysis for ERISA compliance is required; – In what form (cash, securities, etc.); however, in the context of rollovers, it is recommended to – To what type of account; document the file indicating that no fiduciary • Copy of the written recommendation presented to the recommendation was provided; client, including the date; • Copy of the client’s acknowledgement of the 2. What is the scope of the fiduciary service? The recommendation and subsequent acceptance or refusal, supervisor needs to know if the fiduciary service is limited to investment advice, which may be limited to including the date; • Any other documentation required by the supervising firm. recommending a third-party money manager, or if the fiduciary service is more extensive, such as providing discretionary advice on investments; Maintaining this information will help the advisor and supervising firm in the event of regulatory inquiries or legal 3. Are the client’s needs and/or objectives documented? challenges. Documenting client objectives is arguably the most important component of the recommendation; Once the business process is developed, supervising firms should tailor policies and procedures, as well as training, to 4. Does the fiduciary advice provided align with the help ensure appropriate execution. Specifically, at each step objectives of the client? If not, it will be difficult, if not in the rollover process, the procedures and processes should impossible, to support or defend the recommendation as capture the five “W’s”: being in the client’s “best interest.” 1. Why are these procedures and processes in place? 2. Who is responsible for gathering the information; ensuring the completeness of the information; analyzing the information to make a recommendation; and approving the recommendation? 3. What information is required to support the recommendation? 4. Where will the information be maintained and how (i.e., paper or electronic files)? 5. When is the information gathered and supervisory responsibility triggered? Having a consistent, repeatable process properly documented and trained to will help supervising firms successfully manage ERISA fiduciary responsibility.
5. Does the advisor’s file demonstrate a prudent process? In other words, did the advisor: a. Obtain sufficient information to make a recommendation; and b. Provide written analysis to support how the recommendation is in the client’s “best interest?” 6. Are the fees charged to the client reasonable in light of the value of services provided? Recall the factors for determining reasonableness of compensation: a. Alignment of the recommendation with the client’s needs; b. The nature, scope, and frequency of services being delivered; and c. The experience and credentials of the fiduciary providing the advice; OCTOBER 2017
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NSCP Currents 7. If applicable, are all the conditions of the BICE or other PTEs satisfied? Following the process described should enable ability to supervise to the Impartial Conduct Standards; however, there are additional conditions of each PTE, including disclosures, acknowledgements, and/or anti-conflict procedures, to name a few. Supervisors should know the compliance requirements for each PTE and develop testing to evaluate whether they are being met adequately. A supervising firm should determine appropriate control steps for review and approval of new IRAs for adherence with the Impartial Conduct Standards. These controls should identify what documentation is required in a client file to demonstrate that the rollover is indeed in the best interest of the client, who should conduct the supervisory review(s) of that documentation as well as when the supervisory review(s) occur. The control steps will vary from firm to firm but, with appropriate training, could leverage the current supervisory control system. Testing for compliance with the Fiduciary Rule, the Impartial Conduct Standards, and other requirements can begin only after the rollover policies are implemented. As with any testing program compliance personnel should talk to advisors, their assistants, supervisors, and back office employees involved in rollovers to gauge employee/supervisor understanding of their expectations under the Fiduciary Rule, the PTEs, and supervising firm policies. Compliance should choose a relevant sample size, and request access to the underlying client files to test that: required documentation has been collected and maintained and that any required forms are completed and reflect appropriate supervisory approval. Should any lapses be uncovered, compliance should work with the business to remediate any issues and escalate, if necessary.
Method to the madness While the DOL has announced a temporary non-enforcement policy for financial institutions that are working diligently and in good faith to comply with the Fiduciary Rule and exemptions,13 there are many other actors waiting in the wings including the SEC, FINRA and class-action plaintiff’s attorneys. SEC and FINRA examiners often cite deficiencies or bring enforcement actions against supervising firms for supervisory and/or compliance violations arising from a failure to: • Have effective policies in place; • Follow their own internal policies; and/or • Maintain required books and records.14 Therefore, it’s important that a supervising firm’s policies address what’s actually taking place with respect to rollovers and that there’s sufficient documentation in its books and records to demonstrate that advisors and supervisors are following those policies. If the supervising firm’s books and records are not adequate, there is no proof that it is working diligently and in good faith to comply with the Fiduciary Rule and its exemptions, which could expose the firm and its employees to an action from the DOL despite the temporary non-enforcement policy or from 13 Employee Benefits Security Administration, Department of Labor; Field Assistance Bulletin No. 2017-02 (May 22, 2017). 14. Office of Compliance Inspections and Examinations, U.S. Securities, and Exchange Commission; National Exam Program Risk Alert; Volume VI, Issue 3 (February 7, 2017); and Financial Industry Regulatory Authority; 2017 Regulatory and Examination Priorities Letter (January 4, 2017).
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other regulators for lax compliance and supervisory programs or faulty books and records. Finally, contemporaneous written records supporting an advisor’s analysis that a rollover recommendation was in the best interest of a client would bolster a legal defense in a private cause of action. In summary, the Fiduciary Rule creates new requirements for advisors and supervising firms when advising clients on rollovers. Executing in an ERISA-compliant manner is more difficult today than it was on June 8; consequently, some advisors may decide to restrict or eliminate advice on rollovers. However, clients’ needs have not abated, and the advisors and supervising firms who are able to develop a consistent, repeatable, and prudent process will have an advantage over those who do not do so. Rather than suffering from Hamlet-like inaction, successful advisors and financial institutions will find opportunity in the Fiduciary Rule. While the article opened with an adaptation from the most famous line in Hamlet, perhaps the opportunity is best summed up by a quote from Polonius: “though this be madness, yet there is method in it.” Those advisors and supervising firms who develop a prudent method to conduct rollover business unquestionably stand to gain the most from the temporary madness created by the Fiduciary Rule.
