More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- 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.
Questions about where asset managers’ and financial advisors’ responsibilities to clients lie are being clarified in regulatory and court decisions now on the horizon — and the answers appear to be moving in the direction of fiduciary obligation.
On Friday, a federal trial court in Connecticut ruled against the insurance company ING concerning its status as a fiduciary in defined contribution plan administration.
Healthcare Strategies, sponsor of a retirement plan that ING administers, claims that ING made fund choices for its guaranteed investment contract investment option based on the revenue-sharing benefits the company receives rather than choosing the most optimal choice for plan participants.
The Healthcare Strategies case received class-action certification, meaning that ING’s conduct in all plans it administers is at stake. The multinational insurance company sought to summarily dismiss the claim on the basis that it is legally entitled to act as alleged.
But the court held that material issues of fact exist and scheduled a trial to commence Sept. 3.
The National Association of Plan Advisors’ Fred Barstein observes that the Connecticut court steered away from a 7th Circuit precedent that centers plan providers’ liability in plan changes that are actually made and toward court decisions in its own 2nd Circuit that maintain a stricter standard based on the provider’s mere ability to make changes.
At issue will be the plan provider’s discretion to manage investments and whether its ability to make fund changes (from which it can materially benefit through revenue sharing) make it a fiduciary under ERISA regulations.
The Department of Labor nearly put one advisor out of business recently because the advisor failed to disclose revenue sharing that amounted to 10 times the contracted fee, FRA Plan Tools has reported. That case ultimately was settled, with the retirement plan advisor paying more than $200,000 and agreeing to future disclosures.
The fiduciary duty inherent in retirement advice is heating up currently in a DOL regulation concerning IRA accounts expected in a matter of weeks.
The regulation, dubbed a “reproposal” of a 2010 plan that sought to make all broker-dealers managing IRAs into ERISA fiduciaries, could have huge repercussions in a business worth more than $5 trillion.
Much of that business is run by wirehouse and other brokers who do not have fiduciary obligations, and who say that it may not be worth handling millions of small accounts under increased fiduciary obligations.
The Wall Street Journal’s Money Beat columnist Jason Zweig quotes Securities Industry and Financial Markets Association chief Judd Gregg:
“We don’t think the DOL is moving forward in a way that’s going to be constructive at all; it’s going to be destructive,” the SIFMA CEO says. “The folks with small accounts are going to lose the ability to get advice, and their costs will go up.”
Both the ING case and the DOL reproposal concern how to balance professional standards with corporate objectives. Financial advisors, and their clients, may soon be getting a clearer guidance on that, though it remains to be seen how the industry will react to increased fiduciary standards and what that will mean, particularly for small accounts.
Zweig quotes DOL assistant secretary Phyllis Borzi, who oversees the issue, as seemingly unimpressed with the industry’s objection on behalf of small accounts.
“The [brokerage] industry is saying, in effect, ‘If you don’t allow us to continue to give conflicted advice, we won’t be able to give any,’" she is quoted saying. "But there are lots of people out there who are already acting as fiduciaries, and they’re not bankrupt."
Check out DOL, SEC Fiduciary Rules May Clash, Senators Tell OMB on ThinkAdvisor.