More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
New rules proposed by the Department of Labor appear to give registered investment advisors (RIAs) a competitive advantage over brokers and those advisors who are dually registered. The proposed rules, released in February, would not only require that all advisors receive a level fee when giving advice, but would also prohibit brokers from giving "off-model" computer advice to plan participants.
The DOL's investment advice rules apply to both 401(k) plans and IRAs. As explained by DOL, the proposed rule would implement provisions of a statutory prohibited transaction exemption, and would replace guidance contained in a final rule released on January 21, 2009, that was withdrawn by DOL last November. Comments are due to the DOL by May 2.
Since most independent RIAs charge a level fee for their advice they've never committed a prohibited transaction under the DOL's proposal, so the exemption that the DOL has issued doesn't apply to them. However, under the proposed rules, there are two ways broker/dealers--who generally charge commissions--can get an exemption when providing advice: through a level fee and via a computer model offered by a reputable third party. But unlike the withdrawn investment advice rule, the newly proposed one says that brokers cannot give "off-model" computer advice to participants in 401(k)s and IRAs.
What this means is that "if a broker was sitting down as an advisor with a participant and the [broker] ran everything through a certified, unbiased computer model" and then the participant wanted further recommendations beyond that offered via the computer model, the broker could not offer his personal advice, explains Fred Reish, of Reish & Reicher in Los Angeles, a law firm that specializes in employee benefits law. Under the DOL's new rule, brokers are not allowed to give personal advice because DOL believes "there aren't enough safeguards to protect participants" from a broker possibly recommending an investment that would give them a bigger commission.
The proposed changes to the investment advice rule "are about conflicts of interest, pure and simple," Reish says. "The Obama Administration and its administrative agencies are much more concerned about conflicts of interest in the investment community than the Bush Administration was."
Elizabeth Varley, director of retirement policy for the Securities Industry and Financial Markets Association (SIFMA), says that while computer model avenues exist "that a plan sponsor might want to make available to his participants, what we've seen in the marketplace is that participants usually want more" advice. Participants, she says, "want to be able to talk to a person and ask questions that maybe aren't in the [computer] model that apply to their specific situation, so this class exemption would have provided a lot more flexibility, and with some important safeguards. Without that class exemption being available, that flexibility has been lost."
Reish also notes that in the regulation that was withdrawn, IRAs were given "much more relief" than in the newly proposed rule, which says IRAs will be treated the same as other retirement plans. This is bad news for brokers because: "Who's the advisor of the typical IRA?" Reish asks. "Probably every broker out there; tens of thousands of brokers are working with IRAs and they get compensated by commissions, which by definition are, for the most part, not level." The new proposed rules will "focus attention" on this fact and "create an enormous disruption."
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.