More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
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