More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Phyllis Borzi, assistant secretary for the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) said Tuesday that the EBSA plans to “refine” the text of its proposed regulation amending the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) and issue a final rule by year-end.
Borzi (left), speaking at EBSA’s public hearing on amending ‘fiduciary’ under ERISA, which was held at DOL’s headquarters in Washington, said that EBSA has been “working closely” with the Securities and Exchange Commission (SEC) as the EBSA develops its regulation, and that EBSA and the SEC’s goal is to “harmonize both [agencies’] statutes” regarding who is a fiduciary when giving investment advice.
But industry observers doubt that the SEC will issue a final fiduciary rule of its own by year end, even though SEC staff has penciled in the April-through-July time period to bring a proposed rule regarding fiduciary duty to the Commission. Don Trone, CEO of Strategic Ethos, says that the SEC and DOL “should be coordinating their efforts regarding fiduciary” duty, but since the Dodd-Frank Act does not require the two agencies to do so the “probability of ‘formal’ harmonization” of both agencies’ rules is unlikely.
However, Trone (left) says he foresees an “informal” harmonization of the agencies’ fiduciary rules which will outline “baseline professionalism” standards for a fiduciary as well as the fact that investment decisions should be made to a certain risk/return profile of the client. The informal harmonization will also likely state, Trone continues, that the investment strategy should be in writing; the investment strategy should be implemented by experts; fees and expenses should be controlled and accounted for; and the investment strategy has to be monitored on an ongoing basis.
Trone argues that EBSA is attempting to achieve two goals with its fiduciary revisions: to continue to address the requirements set out in the 2006 Pension Protection Act (PPA) to examine whether IRAs should be subject to the same fiduciary standard of care as a qualified retirement plan; and to examine whether other service providers, such as investment consultants, should be subject to a fiduciary standard of care.
EBSA plans to modernize a fiduciary rule that was promulgated by DOL in 1975, which “severely” cut back on who’s a fiduciary through a five-part test. As the retirement market has changed, particularly the need for investment advice, it’s “vitally important” that in defining who’s a fiduciary that we “get it right,” Borzi said. EBSA “questions whether the 1975 regulation is still appropriate,” she said, adding that EBSA is required under President Obama’s recent Executive Order to review if DOL’s regulations “are still valid and useful.”
Norman Stein with the Pension Rights Center noted during his testimony before EBSA executives at the Tuesday hearing that since the outmoded 1975 regulation was put into place, “there has been a seismic shift in the retirement planning world.”
While there was plenty of support for EBSA’s proposed rule, there were also objections. Ken Bentsen, executive vice president of public policy and advocacy at the Securities Industry Financial Markets Association (SIFMA), stated during his comments at the hearing that SIFMA believes the EBSA’s proposed reg “is far broader than the aims it seeks to address. It imposes fiduciary status without a relationship to a plan and creates prohibited transactions and co-fiduciary liability on entities who have no understanding with a plan or IRA that any services at all will be provided.”
Indeed, Kent Mason, a partner with Davis & Harman who testified on behalf of the American Benefits Council (ABC), said that although ABC understands “the desire of the Department to update and improve the regulatory definition of a fiduciary, … We believe that the proposed regulations create too broad a definition.” Mason warned that “an overly broad definition would actually have a very adverse effect on retirement savings by raising costs and inhibiting investment education and guidance for plan participants.”