More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- 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.
Despite launching a new fact-finding initiative regarding what conflicts of interest brokers face when advising individual retirement accounts (IRAs), the Department of Labor told Investment Advisor on Jan. 9 that it plans to release its reproposed rule revising the definition of fiduciary “during the first half of 2012.”
Updating the fiduciary definition under the Employee Retirement Income Security Act (ERISA) is one of the DOL’s Employee Benefits Security Administration’s (EBSA) “most important regulatory projects,” a spokesman told Investment Advisor in an email message. “We are working to complete our cost-benefit analysis and re-issue the rule as soon as possible.” As EBSA has said previously, “we want to take the time to get this rule right, and we are working diligently to do exactly that.”
EBSA’s Office of Policy Research sent a letter to industry trade groups on Dec. 15 asking for each group’s “voluntary assistance” in helping the Administration in its newly expanded regulatory impact analysis that will assess the impact of the reproposed fiduciary rule on ERISA plans and IRAs. Applying a fiduciary standard to IRAs is one of the more controversial aspects of the reproposal.
EBSA asked the groups to provide it with data that will “more rigorously and definitively determine what impact, if any, conflicts of interest faced by brokers or others who advise IRAs have on IRA investors.”
EBSA asked the trade groups to provide such data within 30 days.
Chris Paulitz, a spokesman for the Financial Services Institute, says FSI is “working diligently” to fulfill EBSA’s request despite the fact that it came during the holidays with a very tight deadline. “We will deliver everything we can to the department in our constant effort to be a good resource for the administration,” he said.
BDs, RIAs Could Provide Advice With Varying Comp
Fred Reish, (left), partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, predicts that 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, Reish says, 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.
Meanwhile, rumors persisted that the EBSA plans to push back the April 1 deadline for compliance with DOL’s 408(b)2 and 404(a) fee disclosure regulations. However, the Labor Department spokesman told Investment Advisor early in January that DOL “has not signaled” that the deadline will be extended.
“We have a high degree of confidence that the final rule mandating service provider-to-employer/plan sponsor fee disclosure will be published by the end of this month,” said the spokesman, referring to January 2012. “The department is sympathetic to the concerns expressed by the industry regarding the applicability dates, but has not signaled that the applicability dates will be extended.”
Like other industry officials, Craig Hoffman, general counsel and director of regulatory affairs for the American Society of Pension Professionals and Actuaries (ASPPA), told DOL in a Dec. 19 letter that while ASPPA supports DOL’s efforts to improve fee disclosure for individual retirement plans, “unfortunately the application of both the interim 408(b)(2) and 404(a) regulations is only three months away and the DOL has not issued the final guidance needed to create systems to comply with the regulations.”
Hoffman urged DOL to extend the deadline for complying with 408(b)2 and 404(a) fee disclosure regulations as the department had yet to issue final guidance on either. As the DOL spokesperson stated, that final guidance should be out by the end of January.
EBSA announced in July that it was extending the interim final rule deadline on its plan level fee disclosure rule, 408(b)(2), to April 1, 2012. But Hoffman told DOL that the effective date for the fee disclosure regs should be “no earlier than one year after the 408(b)(2) regulation is published in final form.”
A Delay Past April 1?
However, Reish of Drinker Biddle & Reath says that “at this point, though, I think the DOL has to delay the effective date because it is too late for providers to adjust their disclosure procedures and materials by April 1 to take into account any change; it’s just impossible.”
That should also mean, Reish says, “that the participant disclosures under 404a-5 will be extended, since they are effective 60 days after the 408(b)(2) regulation is effective.”
Reish went on to note that the DOL disclosure regulations for both plan sponsor and participant disclosures are “not clear about the treatment of brokerage accounts for a plan (for example, a small profit-sharing plan) or for a participant-directed plan (for example, a self-directed brokerage account in a 401(k) plan).”
The DOL has given informal guidance about the disclosures that must be made to participants, and those disclosures are minimal, Reish says.
However, Reish notes that where a 401(k) plan consists exclusively of individual brokerage accounts, there are practical issues about how to comply with the 404a-5 disclosures generally. “Since the brokerage accounts are not ‘designated investment options,’ there are only minimal disclosures which must be made concerning the brokerage accounts.” However, he says, where only brokerage accounts are offered, “the structure will not ordinarily include a recordkeeper. As a result, the plan sponsor—perhaps in conjunction with a compliance-only third-party administrator—must make the non-investment participant disclosures, which includes the general disclosures, the administrative expense disclosures and the individual expense disclosures—as well as the quarterly statements.”
Based on Reish’s firm’s discussions with broker-dealers, he says, “there is a lack of awareness of the requirements for the non-investment disclosures under the 404a-5 participant disclosure regulation. As a result, there will be compliance issues in this scenario.”