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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Drinker Biddle & Reath on Thursday held the first of a series of conference calls for advisors on regulation, discussing the controversy over proposed brokerage window rules and how the election could affect the fiduciary debate.
Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath, said on the call that the firm’s “Inside the Beltway” calls will likely be a quarterly event.
Thursday’s call focused on the Department of Labor’s proposed fiduciary requirements regarding brokerage windows. Question 30 on a controversial Field Assistance Bulletin (FAB) had made several statements that “immediately generated reaction from the private sector,” Reish said.
The bulletin, which was released on May 7, contains a number of controversial statements, Reish said. First, it states that “[a]lthough the regulation does not specifically require that a plan have a particular number of designated investment alternatives, the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of ERISA.”
Second, the bulletin states that if “significant numbers of participants and beneficiaries” select nondesignated investment alternatives, plan fiduciaries have an “affirmative obligation” to determine whether it should be treated as a designated alternative.
Finally, if a plan holds more than 25 investment alternatives, the DOL will only require that fiduciaries make the necessary disclosures for at least three of the investments. Fiduciaries would also have to make disclosures for investments that have at least five participants and beneficiaries.
Question 30 is a “good example of how the Department of Labor has become activist,” Brad Campbell, a lawyer with Drinker Biddle and former head of the Employee Benefits Security Administration (EBSA), said on the call.
“Part of the bipartisan backlash [against Q&A 30] is due to the process used,” he added. The guidance went “against the tenor” of rulemaking. “You don’t want rapid action in rulemaking. You want a process where people can respond.”
Two months after the DOL issued the bulletin with the contentious Question 30, they issued a revised bulletin, FAB 2012-02R, that eliminated the question and replaced it with Question 39, Reish said.
The new bulletin effectively eliminated several significant fiduciary requirements that were not provided under current law but had been included under Question 30, such as the requirements to have ‘a manageable number of investment alternatives,’ monitor for ‘significant investment through a brokerage window’ and to provide participant disclosures for any investment selected through a brokerage window by at least 1% of participants, AdvisorOne reported on July 31.
“In short order, we won that battle,” Campbell said of the changes.
Another topic discussed on the call was the DOL’s proposed rule to expand the definition of fiduciary.
“The DOL is clearly trying to capture advisors who don’t see themselves as a fiduciary but the DOL would like to see them as such,” Campbell said. He added that although he doesn’t expect much movement on the proposal until after the election, should President Obama be re-elected, we would see a reproposal that looks only slightly different. He doesn’t expect “wholesale changes, but minimal accommodations to the most vocal critics.”
If Mitt Romney is elected, however, Campbell expects the proposal will disappear entirely. “I have no reason to believe [Romney] has a high priority for this rule.”
Sen. Robert Portman, R-Ohio, took to the pages of the Wall Street Journal on Thursday to argue against undecided financial rules that came about due to the Dodd-Frank Act.
“After three years of bureaucratic excess, the Obama administration has been quietly postponing several multibillion-dollar regulations until after the November election,” Portman wrote. “Those delayed rules, together with more than 130 unfinished mandates under the 2010 Dodd-Frank financial law, could significantly increase the regulatory drag on our economy in 2013.”
He referred specifically to the fiduciary rule and noted that a study conducted last year by the Oliver Wyman Group found the rule could raise retirement account minimums and reduce access to investment advice for 7.2 million IRA holders. “Even the Labor Department was unable to show that the rule's illusory benefits outweigh its substantial costs,” he wrote.