More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
"It's highly likely this legislation will pass the House sometime in June and go to the Senate, and there is significant support in the Senate," says Matthew Hutcheson, an independent fiduciary and a congressional expert who has testified on Capitol Hill many times.
If this occurs, three changes will take place in the relationship between plan sponsors and service providers, according to Hutcheson. One, service providers to any type of retirement plan will be obligated to disclose all fees and costs. At present, the plan sponsor is responsible for gathering this information.
Two, there will be a significant tightening of the conflict-of-interest rule. Hutcheson says that in the past, conflicts of interest were essentially prohibited, with a lot of exceptions. Now, prohibited transactions are going to be less favorably looked upon, and far fewer exemptions will be allowed. "And if a conflict of interest exists, the new rules will explicitly state that before a service provider can provide services, they must disclose the nature of the conflict with an explanation of what it means to the plan sponsor." He says this will allow the plan sponsor to ask intelligent questions in deciding whether to proceed with the firm in question.
Three, all advice-givers to retirement plans, whether explicit or incidental, will be deemed fiduciaries. Whereas a RIA is a fiduciary by statute, a loophole in the code allows someone like a broker to give advice technically but not be considered a fiduciary, according to Hutcheson. Under the new rules, a fiduciary relationship will be deemed to exist "if someone comes to you and starts talking about investments and you feel vulnerable because you lack knowledge; and in that conversation, the broker may say he's not technically giving advice, but if you start to rely on that information; and after you make a decision, if you expect favorable outcomes."
In other words, if vulnerability, reliance and expectation exist, a fiduciary relationship will be deemed to exist between that person and the plan sponsor, irrespective of whether the person is an investment advisor, a broker, a consultant, a CPA or a lawyer, says Hutcheson.
The new rules will apply to 401(k) and 403(b) plans, traditional pensions and, for the first time, IRAs, which have not been covered by ERISA or any other fiduciary regulatory framework, says Hutcheson.
What are the implications for those not considered fiduciaries in the past? First, their business will change because they are going to have to start complying with the fiduciary standard of care, which among other things involves a lot more disclosure. "Being a fiduciary is going to take them from simply selling things to being a professional with a duty of loyalty," says Hutcheson. "They're going to think twice before selling something that may not be in the best interests of the participants."
These service providers may also face a decline in trust as plan sponsors and participants discover that their best interests have not necessarily been put first in the past. This is not a small consideration, and could become a major business issue for some providers as they explain themselves to na?ve plan sponsors. How na?ve have plan sponsors been up to now? "Pretty much completely na?ve," says Hutcheson, "absolutely, unequivocally na?ve."
Michael S. Fischer (email@example.com) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.