More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- 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.
The Department of Labor’s Employee Benefits Security Administration (EBSA) released on Monday its long awaited final regulation on investment advice, which stipulates that service providers can also provide investment advice if they meet two criteria: under a level fee basis or via a computer model.
“Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America’s workers increasingly depends on their investment decisions,” said Phyllis Borzi, EBSA’s Assistant Secretary. “This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest.”
The DOL’s investment advice rule—which Borzi made clear is separate from and does not affect the DOL’s reproposed rule on the definition of fiduciary investment advice—was cleared by the Office of Management and Budget (OMB) on Oct. 4.
Borzi (left) said during a press briefing Monday that the investment advice rule is projected to reduce investment mistakes made by retirement plan participants by $7 billion to $18 billion annually. She added that she hopes that by the rule's Dec. 27 effective date those "employers who have been reluctant to provide investment advice as a service will move forward" and do so. "Participants are always asking for individual advice; they need it."
The regulation implements a prohibited transaction exemption under an amendment to the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) that is part of the Pension Protection Act (PPA) of 2006.
However, Borzi explained during the press briefing that the final investment advice rule is a “supplement” to DOL’s fiduciary rule. As the fiduciary rule will identify “the class of people” who are fiduciaries under ERISA, the investment advice rule “assists fiduciaries in making sure they are providing quality, unbiased investment advice” to participants in 401(k)s and in the IRA marketplace, Borzi said.
As DOL explains, the prohibited transaction rules in ERISA and the IRC generally prevent a fiduciary investment advisor from recommending plan investment options if the advisor receives additional fees from the investment providers. “Although these rules protect participants from conflicts of interest,” DOL says, “ERISA provides exemptions from the rules in appropriate circumstances and permits the department to grant exemptions that have participant-protective conditions.”
The new investment advice regulation implements an exemption that Congress enacted as part of the PPA to improve participant access to fiduciary investment advice, which contains certain safeguards and conditions to prevent investment advisors from providing biased advice that is not in a participant’s best interest.
Brad Campbell, former head of EBSA who's now counsel with the law firm Schiff Hardin in Washington, told AdvisorOne on Monday that while the goal of the final rule is to "allow a service provider who has
Says Campbell: "You can already provide a form of computer model-based advice under prior DOL advisory opinion, and you can already do a form of fee leveling. Yes, the new regulation adds some new variations on these themes, but they do not materially change the likely take-up rates from current law. In other words, there is not a large group of advisors who have been anxiously awaiting these new variations just so they can provide services they are not already providing."
Campbell sees the final rule as "another lost opportunity to make meaningful reforms that would facilitate the availability of face-to-face investment advice."
To qualify for the exemption in the final regulation, DOL says that “investment advice must be given through the use of a computer model that is certified as unbiased by an independent expert or through an advisor compensated on a ‘level-fee’ basis, meaning that the fees do not vary based on investments selected.” Both types of arrangements, DOL says, “must also satisfy several other conditions, including the disclosure of the advisor’s fees and an annual audit of the arrangement for compliance with the regulation.”