More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
One of the most troubling elements of the Department of Labor’s (DOL) effort to redefine the term “fiduciary” in relation to IRAs and company-sponsored retirement plans is the Department’s complete failure so far to clearly define the problem it is trying to solve. More than a year after the DOL’s initial attempt to rewrite the rules for Main Street IRA investors and their advisors, we still do not know exactly what the Department hopes to accomplish with this initiative.
What we do know are the significant unintended consequences; that mandating a fiduciary standard for IRAs would have a profound negative impact on the 19 million American IRA investors. The DOL’s initial proposal would have forced already financially strapped Americans to pay dramatically higher fees for professional financial advice, and could have priced many of them out of the IRA market altogether.
With this in mind, more than 50 House Republicans and 30 House Democrats sent separate letters to the Department late last year, setting forth a clear set of common-sense criteria for the DOL to follow in its ongoing effort to rewrite the regulation. One of the most important items on the list is that the new rule must be carefully and effectively designed to address well-defined and documented problems in the retirement planning advice business.
How is the Department responding to this guidance in its efforts to rewrite the proposal? More than three months after a long, bipartisan roster of Congressional leaders reached out to express their concerns, we still don’t know. We’re simply told to sit back and wait.
In their letters to the DOL last year, House Republicans and Democrats spelled out a number of basic and sensible criteria the Department must follow as it re-works its proposal. In addition to providing an effective solution to a clearly-defined problem, the revised proposal must:
- Clearly recognize that IRA accounts are significantly different from employer-sponsored plans because the IRA investor has nearly limitless choice among service providers and investment products;
- Ensure that plan participants and plan sponsors will continue to be able to receive the critical information they need to expand retirement savings and coverage;
- Preserve investor access to and choice among financial products and services delivered by qualified financial professionals, using whatever business model best fits the investor's objectives;
- Avoid costly new regulatory requirements that exceed their proven benefits for investors; and
- Not compound the investor confusion that the Securities and Exchange Commission’s recent study under the Dodd-Frank Act identified as the primary problem for retail investors. Effective regulation must add to the public certainty, not diminish it.
The Financial Services Institute (FSI) believes that financial advisors, members of Congress and investors across the country shouldn’t have to wait until this rule is re-proposed to find out what problem the DOL is trying to fix. We urge the Department to share their evidence of problems prompting this pending rule and, hopefully, to dispel the conventional wisdom that their effort is a solution in search of a problem.
We urge the DOL to update the public soon on its progress in re-writing this rule.
Unless the Department incorporates Congress’ guidance, the new proposal could jeopardize investor choice, raise the cost of financial advice for Main Street Americans and increase investor confusion at a time when so many are already hurting. These are outcomes that none of us—regulators, legislators, investors or financial professionals—can afford.