More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
Individual retirement account holders may find themselves brokerless if the Department of Labor (DOL) adopts a recently proposed rule that would subject investment professionals associated with the accounts to a fiduciary standard.
Testifying before the U.S. House Education and Workforce Committee Kenneth Bentsen, a vice president at the Securities Industry and Financial Markets Association (SIFMA), a securities industry lobbying group, warned that brokerages will drop millions of IRA account owners if the proposed rules are finalized.
The Employee Benefits Security Administration (EBSA)—the agency of the U.S. Department of Labor responsible for administering ERISA—released proposed regulations on Oct. 22, 2010, that would expand the reach of the plan fiduciary rules nearly every advisor who touches the plan, advising either an employer or employee participants of the plan.
According the DOL, the new rules only bring the regulations in line with the definition of Employee Retirement Income Security Act of 1974 (ERISA). DOL regulations significantly narrowed the definition of fiduciary to exclude many advisors serving plans—for instance, when they advise a plan on an infrequent basis.
Under the new rules, a fiduciary is anyone who provides individualized advice or recommendations to a plan with a mutual understanding with plan administrators that advice is being given.
What’s the Cost?
In the proposed regulation, the Department of Labor considered the costs of the rule for service providers but failed to touch on the cost of the regulation for “plans, beneficiaries and IRA holders”—who bear the ultimate cost and benefits of any regulations.
There are around 7 million IRA accounts with less than $25,000 (by SIFMA’s estimation). About 1 million of those accounts have balances under $1,000. Most of these accounts are commission-based.
According to SIFMA, the new rule would push these 7 million small accounts to an advisory model. But most firms require a minimum account balance to be on the advisory model, leading SIFMA to speculate that brokerages will drop millions of accounts if the proposed rules are finalized.
Bentsen also testified that the new rules would increase costs for IRA owners. Due to conflicting rules, brokers may no longer be able to execute customer orders from inventory but will be required to execute the order through another dealer.
Small businesses would suffer in particular as a result of the rule. Broker-dealers often help small businesses set up retirement plans, but if commission-based sales are prohibited, most brokers would cease to offer this service. Many small businesses would balk at paying an advisory fee for plan setup and their retirement plans would suffer as a result.
It isn’t just the securities industry lobby agitating against the proposed DOL rule. Barbara Roper, director of the Consumer Federation of America, recently testified against the rule before Congress. Law professor and investor advocate, Mercer Bullard, also recently testified against the rule.
SIFMA asked that the DOL withdraw the proposed regulation and propose a new rule that includes exemptions necessary to ensure protection of plans and their beneficiaries.
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See also The Law Professor's blog at AdvisorFYI.