More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Department of Labor’s Employee Benefits Security Administration (EBSA) issued Thursday a proposed rule under the Employee Retirement Income Security Act (ERISA) that broadens the definition of who’s a fiduciary when giving investment advice to an employee benefit plan or a plan’s participants.
Phyllis Borzi, Assistant Secretary of EBSA, told reporters on a conference call on Thursday that the proposed rule was designed to clarify who was a fiduciary under ERISA.
“Fiduciary status is fundamental to ERISA’s framework for protecting the interests of plan participants and the statute contains a broad functional test for determining who’s a fiduciary” when providing investment advice, Borzi said. While ERISA is “very simple and straightforward” about who’s a fiduciary in stating that it’s “someone who renders investment advice for a fee or other compensation, direct or in direct, with respect to any monies or other properties of the plan,” a 1975 regulation issued by DOL and certain interpretations since then have taken “a much narrower approach” to defining fiduciary, Borzi said.
The current rule regarding fiduciary, she continued, “simply is not working.” The “dramatic evolution in the marketplace” coupled with “the enforcement activities that the DOL has undertaken both in our investigations and our litigation over the past three decades have made it perfectly clear that these arcane rules really interfere with the ability of the Department and fiduciaries to understand where the lines are being drawn, and to protect beneficiaries and participants.”
The current fiduciary definition, Borzi explained, also required a “cumbersome and fact-intensive” five-step analysis to determine who is considered a fiduciary. Under the newly proposed rule, the five-part test will not be “the determining factor” anymore in determining fiduciary status, Steve Saxon, chairman of Groom Law Group, told AdvisorOne in an interview. “If you’re a registered investment advisor (RIA) and you’re providing recommendations on the purchase or sale of securities, you’re a fiduciary.” Equally significant, he says, is that “even if you’re not an RIA, [DOL has] made it easier to pass muster under the five-part test and become a fiduciary because they’ve eliminated the mutual understanding provision.”
EBSA is taking comments on the proposed rule until Jan. 20, 2011. The proposed rule would define certain advisors as fiduciaries even if they do not provide advice on a regular basis. DOL says that upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice-related services to such plans and accounts. “Investment advisors under the ‘40 Act would always be considered to be fiduciaries under this [newly proposed] rule,” Borzi said. “If you hold yourself out as a fiduciary, you will be a fiduciary under this regulation.”
Saxon says that historically, DOL “has struggled with sticking advisors with fiduciary status,… so the changes that [DOL has] made have addressed the problems that they’ve had in the past.” The “end-game” for DOL with the proposed rule is to have the ability to focus on advisors’ conflicts of interest and to know how advisors get paid. The rule, he adds, “not only applies to advice on securities and other property, but it also applies to advice on the selection of investment managers.”