Registered investment advisors might think that they are in the clear as fiduciaries when it comes to the Department of Labor’s investment advice rules, but they might want to think again.
Even fee-only RIAs have new obligations under the DOL’s investment advice rules when they recommend rollovers, said Bradford Campbell, Feagre Drinker partner and former assistant secretary of the Employee Benefits Security Administration.
“I think one of the groups that’s not fully appreciating how much work DOL is setting out for the year are registered investment advisors,” Campbell said during the firm’s quarterly Inside the Beltway webinar last week. “RIAs tend to think of themselves as being less conflicted because of their typically fee-only arrangement. But the way DOL has interpreted this, if you give a recommendation to do a rollover, you are automatically influencing your own compensation, regardless of how you’re getting paid.”
That means RIAs would need to use one of the prohibited transaction exemptions, either the newest PTE 2020-02 or one of the older exemptions. PTE 2020-02 is an interpretation of the original ERISA regulation. The exemption went into effect on Feb. 16, but the DOL said it would not enforce the requirements until Dec. 20.
The DOL’s latest investment advice rules were intended to harmonize with the Securities and Exchange Commission’s Regulation Best Interest regulation, which some advisors consider the higher standard. But even advisors who comply with Reg BI cannot assume they automatically satisfy the DOL’s rules and guidance. Although the push to standardize rules between departments was a Trump administration objective, the Biden administration apparently does not share that perspective.
“The Trump administration said that when they were doing 2020-02, their intent was to try to harmonize standards with the SEC, so that compliance was easier,” Campbell said. “I think there’s a very different tone here with the Biden administration, who’s building on what the Trump folks did, but have kind of removed that tone of conciliation and emphasize that this is a separate set of conditions.”
RIAs and broker-dealers would likely fall under PTE 2020-02 and its conditions, which Campbell said can be heavier lift than advisors might expect.
“Those conditions are pretty onerous actually,” Campbell said. “DOL built on those in the guidance to provide new elements of those conditions that would affect things like compensation grids and how they should be structured and how they should be applied.”
Financial institutions, which includes RIAs, broker-dealers, insurance carriers, banks and trusts, will need to adopt policies and procedures that identify and mitigate conflicts of interest.
“And the FAQs that DOL put out were not that precise about how to do that,” Campbell said, “but suggested that just because you’re complying, for example, with regulation best interest from the SEC, which has conflict mitigation policies and procedures, DOL made it very clear that that doesn’t mean you’re in compliance with ERISA.”
Fred Reish, also a Feagre Drinker partner participating in the webinar, added a warning for broker-dealers as well. Although they are correct that complying with the SEC’s Reg BI covers many of the DOL requirements, there are some important distinctions.
Reish pointed out a few significant differences between the regulations. The DOL requires broker-dealers to:
• Mitigate conflicts of interest of their representatives and the B-Ds themselves. (The SEC rule applies only to representatives.)
• Receive only reasonable compensation for the B-D and advisor and have policies and procedures in place to ensure that.
• Give participants or the retirement investors a statement saying that the broker dealer and the advisor are fiduciaries.
• Give investors a written statement about why the rollover recommendation is in the best interest of the retirement investor and have policies and procedures in place designed to cause that to happen.
“So, it’s a big lift,” Reish said. “And those are just some of the examples for broker-dealers. On the other hand, RIAs don’t have any mitigation requirements. They’ve got to get all of that in place, plus everything else I just said. And I do agree with Brad that investment advisory firms seem to be a little bit slower coming to the table on this than broker-dealers are. I think they’re all relying on the impartial conduct standards non-enforcement policy until Dec. 20. But there’s a ton of work to be done.”
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at firstname.lastname@example.org.
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