The DOL has issued a temporary policy stating that it will not bring enforcement actions against firms that are not Rule compliant by April 10. In other words, DOL will not bring enforcement actions against advisers for the “gap” period between April 10 and the date on which the DOL officially delays the Rule (if it, in fact, delays the Rule). If the DOL decides to not delay the Rule at all, firms have a “reasonable” period of time in which to send out the required disclosures and otherwise get compliant.
The DOL has proposed an initial 15-day public comment period on the issue of whether to delay the April 10 implementation date of the DOL fiduciary rule, which, if ever effective, would subject large amounts of IRA rollover advice, and other retirement advice, to a fiduciary standard. After the 15 days, the DOL has proposed another 45 days during which the DOL is to analyze the economic impact of the Rule on investors and the marketplace.
Specifically, in his February 3, 2017 memorandum, President Trump directed the the DOL “to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” Accordingly, it is likely that the Rule, as is or amended, will not become effective for some time. Meanwhile, many broker dealers, registered investment advisers, and the representatives they employ have already spent thousands of hours in training and millions of dollars preparing to comply with the Rule.
RIAs serving customers on a percentage of assets under management (% AUM) basis, or for some other non-variable form of comp (e.g., flat fees), need to be aware that it is not “business as usual” under the DOL Fiduciary Rule, some version of which is likely to go into effect in 2017. While such advisers are not subject to the full Best Interest Contract Exemption Requirement with its onerous contract and disclosure requirements, they must comply with a lesser requirement, sometimes called “BIC Lite”.
Many RIAs are surprised to learn that they will have this additional requirement because they are already fiduciaries under the 1940 Investment Advisers Act and are often fiduciaries under ERISA and DOL guidance when providing regular advice to Plans. The DOL Rule, however, extends ERISA and Tax Code fiduciary status to one-off investment advice about rollovers from 401ks to IRAs and from commissioned IRA accounts to fee IRA accounts. RIAs who are deemed to be giving (even limited) “investment advice” to Plans and IRA owners will have to comply with BIC Lite.
Specifically, advisers will have to provide a written acknowledgement of fiduciary status to Plan and IRA clients and state that they will abide by certain Impartial Conduct Standards. Under those standards, advisers must act in the client’s best interest, receive only reasonable compensation, and not make misleading statements to clients. RIAs must also document the advice given (including apprising customers of the pluses and minuses of staying where they are versus rolling over) and the reasons for that advice.
In sum, the biggest changes under the DOL Rule apply to folks charging variable compensation (e.g., commissions) to Plans and IRA owners. That said, RIAs should not assume that their current policies and practices bring them into full compliance with BIC Lite. RIAs should check those policies and practices, including documentation procedures, and make sure they are up to snuff.
The DOL Fiduciary Rule, effective April 2017, is among the items that the new administration may put on hold upon taking office in January 2017. Once effective, the Rule makes all financial advisers providing rollover and other advice to retirement investors “fiduciaries” required to put retail customers’ interests before the advisers’ interests in getting compensated. Broker-dealers, investment advisers, and mutual fund complexes have already sunk millions of dollars into upgrading and changing their compliance and business models in anticipation of the Rule.
At the center of the Rule is the so-called “Best Interest Contract” Exemption or BIC. It permits fiduciaries to enter into prohibited transactions (e.g., accepting commissions in connection with providing rollover and other investment advice) if the financial firm and professional enter into a BIC with the customer, provide certain disclosures, adhere to Impartial Standards of Conduct, charge only “reasonable” compensation, and acknowledge fiduciary status.
Due to its complexity and related compliance costs, some firms have announced that they will not be opening new commissions-based retirement accounts. Others have said that they will continue to open such accounts but will make continuous efforts to review accounts for the appropriateness of commission-based versus fee-based compensation based on a number of factors (e.g., the amount of trading in the account).
The new administration may ask the SEC to step in and issue a unifying rule covering investment advice to retirement accounts. Currently, the SEC’s regime for registered investment advisers under the 1940 Investment Advisers Act provides that investment advisers (who typically charge a percentage of assets under management) are fiduciaries. Such advisers may enter into conflicted transactions if adequate disclosures are made to the customers and if not otherwise prohibited by law.
By contrast, SEC Rules do not impose a fiduciary duty on brokers who provide rollover and other advice to retirement accounts in return for a commission. Brokers charging a commission for transactions are not considered fiduciaries and are instead held to the lesser “suitability” standard.
Regardless of whether the DOL Rule survives, the kinds of changes and industry introspection that have occurred are probably not a complete waste of time and money. FINRA and the SEC are already monitoring investment advisers and broker-dealers for conflicted transactions and policies with respect to compensation. For example, FINRA tends to take a very broad view of whether an investment recommendation, including a rollover recommendation, is “suitable”. Further, the plaintiffs’ litigation bar has long been asserting claims for breach of fiduciary duty in FINRA arbitrations even in the technical absence of such a duty.
Bottom line: regardless of the durability of the DOL Rule, advisers and their firms should continue evaluating their business practices to conform to a “best interests” standard.
For further discussion, here is a recent article from The Hill:
On August 19, 2016, Eric Ben-Artzi, a former Deutsche Bank risk officer, stated he would not accept his portion of a $16.5 million whistleblower award from the SEC because the executives he contends were responsible for overvaluing certain portfolios at the bank were not being personally held accountable in the bank’s settlement with the SEC. Ben-Artzi had provided information to the SEC, which led to a $55 million fine and settlement in 2015.
Ben-Artzi’s main criticism of the settlement and whistleblower award is that Deutsche Bank shareholders and rank-and-file employees bear the cost of paying such penalties. He also accused the SEC of having too many connections to the bank through the “revolving door” between government and the industry. Ben-Artzi noted that his ex-wife and attorneys may have claims on portions of the award. He also stated that he would accept his portion if he was sure it came out of the pockets of the executives who he claims caused violations of the securities laws.
Here’s a Bloomberg article on the subject:
Having substantial assets under management (AUM) can really boost an investment adviser’s ability to attract new money. Accordingly, there is tremendous pressure to report strong numbers to the investing public, including through news sources (e.g., Barron’s top advisors list). As one adviser has found out, the price of inflating such AUM numbers can be millions in dollar in fines and a permanent bar from the industry.
Specifically, an SEC Administrative Law Judge (ALJ) has found that Dawn Bennett and her firm falsely claimed between $1 – $2 billion in AUM when the most she ever had was $400 million. Ms. Bennett made such claims on a radio show she hosts and to Barron’s magazine in order to secure “top Barron’s advisor” recognitions for three years. In addition, Ms. Bennett provided performance information based upon “model portfolios” while representing that such returns were actual customer returns. Ms. Bennett and her firm also face FINRA customer arbitrations relating to the above issues as well as alleged account churning.
In its decision, the ALJ fined Ms. Bennett $600,000 and her firm $2.9 million. The ALJ also ordered $556,000 in disgorgement and imposed a permanent industry bar finding that Ms. Bennett “is not fit to remain in the industry in any capacity.”
Bottom line — while the temptation to inflate performance is very strong, especially in this competitive market, advisors who make false statements do so at their own peril.
Here is a link to the ALJ opinion — https://www.sec.gov/alj/aljdec/2016/id1033jeg.pdf
The SEC’s investor advocate, Rick Fleming, has told Congress that one of the SEC’s focuses in the coming budgetary year (starting October 2016) will be the quality of advisor and broker dealer fee disclosures. The SEC is concerned that such disclosures (referencing things like advisory, trailer, administrative, “regulatory,” and custodial fees) are confusing to retail investors who don’t know industry parlance. Broker dealers are likely to be paying extra attention to the quality of their disclosures, not only because of this initiative but because the “best interests” standard under the DOL’s fiduciary rule will take effect in April 2017. For further discussion, please see the link below.