More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- 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.
Fred Reish, well-known among advisors as the ERISA guru, recently predicted areas of “relief” that the Department of Labor’s Employee Benefits Security Administration will provide when it reproposes its rule amending the definition of fiduciary early next year.
Phyllis Borzi, assistant secretary for EBSA, announced Oct. 25 that the administration would repropose its controversial rule amending the definition of fiduciary under ERISA “shortly after the first of the year.”
Reish (left), partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, says the decision to repropose the rule is a “victory for the private sector and particularly for insurance companies and broker-dealers who objected to a number of provisions in the initial proposal.” However, he says, “the victory may be limited” as DOL will likely provide relief “on certain issues, but not on others.”
As Borzi noted on Oct. 25, the basic structure of the proposal will remain in place. As Reish notes, while “a broad revision of the regulation” is unlikely, “there will be ‘adjustments’ to deal with specific issues.”
While this news “may be of welcome relief to the financial services industry,” Reish says, “it will probably not be helpful to those who are concerned about fiduciary status for ongoing services and recommendations to qualified retirement plans, such as 401(k) plans.”
In those cases, Reish continues, “specific recommendations are made and the services are ongoing. As a result, it is likely that the changes in the re-proposal will continue to be expansive in terms of broadening the definition of fiduciary advice—particularly for small- and mid-sized plans.”
Following are Reish’s seven “best guesses” on the areas in which DOL will provide relief:
- Individual retirement accounts: It is likely the DOL will extend the exemptions of Prohibited Transaction Class Exemption 86-128 to virtually all advice given to the owners of IRAs. In other words, it is likely that both broker-dealers and RIAs will be able to give individualized advice to IRA owners and receive compensation that is not level, that is, the compensation may vary based on the recommendations, which would be more consistent with a broker-dealer business model than with an RIA business model. It will be interesting to see if the DOL imposes any limitations on that exemption, for example, disclosures concerning any variable compensation.
- Commissions: Many of the people who criticized the proposed regulation asserted that it precluded commissions as compensation. That is because, where advice is given and compensation is variable, it can result in prohibited transactions. On the other hand, level compensation, regardless of whether it is a fee or a commission, would not result in a prohibited transaction. It seems likely that, in response to the criticism, the DOL will clarify that, commissions are not per se precluded as a form of compensation for fiduciary advice, so long as they are level.
- Insurance: In certain cases (for example, insurance agents), the agent represents the provider (i.e., the insurance company) and not the customer (e.g., the plan). The proposed regulation created an exemption for those cases, so long as, among other