More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The failure of the Securities and Exchange Commission and the Department of Labor to collaborate on their “overlapping” fiduciary rules on advice to IRA owners will render the SEC’s current cost-benefit analysis worthless, says the lawyer Kent Mason.
Mason, a partner at the law firm Davis & Harman in Washington—which represents the companies that participated in the Oliver Wyman study on IRAs released to the DOL and the SEC last April—told the SEC on Thursday that the agency's public comment request issued March 1 on costs and benefits of a fiduciary rule includes “a fundamental omission.”
“The DOL project will address, among other things, exactly what the SEC is examining, i.e., the standards of conduct and other obligations of broker-dealers ‘when providing personalized investment advice about securities to retail customers’ who are IRA owners,” Mason told the SEC in his comment letter. “Because it is not possible to determine the effects of possible SEC reforms without taking into account the interaction with possible DOL reforms significantly affecting the same conduct and the same IRA market, the responses to the SEC Request will virtually all be incorrect as soon as the DOL acts, thus rendering the SEC’s administrative record unhelpful.”
Mason goes on to write that there is “complete overlap” between the SEC and DOL fiduciary projects on investment services provided to IRA owners.
“Since IRA assets were approximately $4.9 trillion as of the end of 2011, the degree of overlap between the two projects is enormous,” Mason said.
David Tittsworth (right), executive director of the Investment Adviser Association in Washington, counters that “the DOL fiduciary rulemaking and the SEC’s pending request for information stem from two different laws.”
While the subject matter is related, Tittsworth says, “the provisions of ERISA generally governing the conduct of fiduciaries of pension plans are separate and different from Section 913 of the Dodd-Frank Act, the provision of law that authorizes the SEC to issue rules relating to the standard of conduct for broker-dealers that provide investment advice to retail customers.”
While the industry has consistently urged the SEC and DOL to work together, Tittsworth adds, “as a matter of strict statutory interpretation, the SEC and DOL are constrained by—and must follow—very different statutory mandates. In fact, the argument could be made that, had Congress intended the SEC and DOL to work together on fiduciary rulemakings, Congress could have done so.”
As Phyllis Borzi, head of DOL’s Employee Benefits Security Administration and chief architect of the fiduciary rule, has told AdvisorOne previously, while there is a “primary commonality” between the SEC’s Dodd-Frank project to put brokers under a fiduciary mandate and EBSA’s fiduciary project, which is “to be more clear as to who is a fiduciary under [DOL and SEC’s] respective statutes,” it’s impossible for the two to come out with one fiduciary standard as the statutes they adhere to are “so very different.”
But Mason maintained in his comment letter that “retail customer confusion” would ensue if the SEC’s request for feedback, which also asks about such confusion, isn't modified to address the following “core issue.”
Assume that a retail customer asks a broker-dealer for investment assistance with respect to a $30,000 non-retirement retail account and a $40,000 IRA account. The broker-dealer in this example could provide investment assistance with respect to the non-retirement account. However, under the original DOL proposed regulation, as generally interpreted by the IRA community, a broker-dealer would have generally been prohibited from providing investment assistance with respect to an IRA (at least without a major restructuring of the broker-dealer industry).”
Thus, the broker-dealer would have to tell the customer that he is prohibited from providing investment assistance regarding the IRA account. Moreover, the customer would be required to agree that in investing the IRA assets on her own, the customer would not even consider anything the broker-dealer said regarding investing the non-retirement retail account.
Any normal retail customer would be bewildered by this arrangement.
Read Oliver Wyman Releases Data to DOL on IRA Fiduciary Costs on AdvisorOne.