More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- 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.
Of the three Washington heavyweights who will play a crucial role in advisors’ lives this year, Phyllis Borzi, assistant secretary for the Department of Labor’s Employee Benefits Security Administration (EBSA), will have the most immediate impact.
Emboldened by another four years in her position under a re-elected Obama administration, Borzi is adamant that EBSA’s fiduciary rule will see the light of day this year. Stating in December that EBSA would release its fiduciary reproposal in the next several months, Borzi promised at a recent conference that industry concerns have not fallen on deaf ears. Said Borzi: “When people see the reproposal, reasonable people with open minds will say [DOL] listened, that [DOL] addressed the legitimate issues that were raised in the long comment process.” She added: “The reproposal will be better, clearer, more targeted and more reasonably balanced.”
While advisors will closely watch newly christened SEC Chairman Elisse Walter, as well as Rep. Jeb Hensarling, the incoming chairman of the powerful House Financial Services Committee, action will occur on the DOL’s controversial rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA).
EBSA’s reproposed rule will be backed by a “substantial economic analysis” and will likely apply “the strict ERISA fiduciary standard to nearly all those who provide investment advice to either plan sponsors or to plan participants,” said Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College. Even more dramatic, he said, will be the extension of ERISA’s fiduciary standard to cover IRA rollover accounts. “With these moves, ERISA’s standards will apply to over $15 trillion of financial assets held by individuals and in retirement plans in the United States,” Rhoades said.
Brad Campbell, former head of EBSA who’s now an attorney with the Financial Services ERISA Team at Drinker Biddle & Reath in Washington, added, however, that the changes to the revised fiduciary rule would have to be “quite significant” to address the concerns raised by many service providers, including broker-dealers.
Campbell said that he believes the revised rule proposal will actually become “more controversial” with respect to IRAs. “I think [DOL] not only will continue to apply the rule to IRAs much as originally proposed, but is likely to propose new restrictions on solicitation of IRA rollovers.”
Fred Reish, partner and chairman of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, said he believes the new version of the fiduciary rule will be “an expansion of the existing regulation.” The real key, though, will be in the prohibited transaction exemptions, he said.
For instance, Reish said he believes the definition of fiduciary advice will be the same for retirement plans and IRAs. The problem is that “over the years, the sales and compensation practices regarding IRAs have evolved in a way that is fundamentally in conflict with subjecting broker-dealer sales practices and compensation to the fiduciary prohibited transaction rules.” In fact, he continued, “but for PTCE 86-128, most IRA compensation practices would be illegal. So, if the definition of fiduciary advice is expanded, the DOL should also expand the exemptions in 86-128 to exclude, perhaps with better disclosure, most common compensation practices from the prohibited transaction rules.”
The re-proposal, Reish continued, will also likely provide “greater clarity” on the Seller’s exception and the Platform exception. As Reish explained, the Seller’s exception said that, “where a person is an agent of a principal, and where it was clear, then there was an exception to the fiduciary rules for ‘touting’ the principal’s products or investments.”
The Platform exception said that for recordkeepers, “there would be an exception for giving sample lineups of mutual funds to plans,” Reish said. “That might occur, for example, in connection with a conversion from one provider to another provider where the new recordkeeper gave the plan sponsor a list of similar mutual funds that it could recordkeep. It also occurs where a plan sponsor asks the recordkeeper to provide a list of mutual funds that pay revenue sharing that will cover the cost of carrying the plan.”
Progress on SEC Fiduciary Rule is Less Clear
The SEC’s progress on its rule to put brokers under a fiduciary mandate is less clear. The agency announced in its 2012 Financial Report that it plans to “move forward” this year with a uniform fiduciary standard rule for advisors and brokers as well as “continue to assess” ways to harmonize advisor and BD rules when they are providing similar services.
Incoming Chairwoman Walter faces opposition from the two Republican commissioners, Troy Parades and Daniel Gallagher, who have “expressed reservations about a fiduciary rulemaking in the absence of appropriate cost-benefit information and analysis,” David Tittsworth, executive director of the Investment Adviser Association, said in a recent interview.
With Walter, a Democrat, now heading the agency—at least until the end of 2013—the Commission will face a potential 2-2 deadlock on rules that come before it. “There may not be enough for a majority vote to issue a proposed rule or request for further comments,” Rhoades noted. One possibility, he said, is that the commissioners “split into three camps: those who oppose application of the fiduciary standard upon broker-dealers; those who desire a weakened disclosure-based standard of conduct (not a true fiduciary standard, although it may be called such); and those who embrace a bona fide fiduciary standard for broker-dealers who provide personalized investment advice.”
Industry officials have predicted that Hensarling’s priorities will not include re-introducing legislation introduced in 2012 by his predecessor calling for a self-regulatory organization (SRO)—namely FINRA—to oversee advisors. But don’t count on FINRA and other financial services groups to sit idle.
Despite assertions that Hensarling will put the SRO bill for RIAs “on the back-burner, the influence of FINRA, SIFMA, FSI, the insurance company lobby, and the Wall Street broker-dealer and investment banking lobby should not be underestimated,” said Rhoades.
Lobbying Efforts in 2013
As to investment advisory lobbying efforts this year, the Financial Planning Association (FPA) recently announced that under the direction of new CEO Lauren Schadle, it will be replacing its Washington advocacy staff with The Raben Group, a Washington-based consulting and lobbying group.
The FPA, of course, is part of the industry lobbying consortium that also includes the CFP Board and the National Association of Personal Financial Advisors (NAPFA).
Rhoades noted that with the financial planning profession increasingly centered on the CFP Board’s certification process, and the rise in the number of CFP certificants continuing, the CFP Board “will likely face closer scrutiny of its own application of the fiduciary standard upon its certificants.”
The question that Rhoades said remains is whether the CFP Board will lead “financial planners toward a true profession bound together by a bona fide fiduciary standard, or will it merely follow and, in doing so, risk losing its chance for preeminence as the consumer mark of choice in the years to come.”