More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
My recent blog post, Risk Management: “Your Client’s 401(k) Plan and the F-Word, was written in response to a Greenwald & Associates survey, reported in this publication, finding that the Department of Labor's expected redefinition of fiduciary would lead many small businesses to drop their retirement plans or matching contributions. Further research reveals the spin machine hard at work. (Due to FINRA constraints I cannot link to the survey here, but it can be found with a Web search.)
Part of a question on Page 23 of the survey states: “The Department of Labor is considering prohibiting both retirement plan providers and the advisors who sell retirement plans to employers from assisting the employers in the selection and monitoring of the [investments] in the retirement plan.” (Due to Financial Industry Regulatory Authority rules, I was required to change a word in the question, but the intention is the same.)
Prohibiting? Really? I am not a lawyer; I am also not giving legal advice in this commentary. Yet the authors of the survey are lawyers. “Davis & Harman LLP commissioned and co-sponsored this report on behalf of a coalition of financial services organizations that provide retirement services to millions of Americans,” according to a statement accompanying the survey.
If the proposal is really so horrific to small-business retirement plans, why is it not sponsored by a broad coalition of business groups, the real end users of retirement fiduciary services? I suppose we’ll never know.
The Employee Retirement Income Security Act, signed into law by President Gerald Ford in 1974, begins with the notion that running a benefit plan of any sort requires diligence and no self-dealing. Further, many acts are prohibited until allowed by a prohibited transaction exemption (PTE). Thus, it is not the DOL newly considering a prohibition; prohibitions have been there for 40 years. For example, ERISA prohibited delivering advice for a fee without declaring that you are acting as a fiduciary and meeting a few other simple tests. The PTE, therefore, allows for advice, as long as the fee, the fiduciary status and a few other items are executed. That’s simple: advice is not prohibited, and the stewardship rule is definitely not new.
We need to ask the questions: why the spin, why the fear? As I said in my earlier article, the DOL has been seeking to create clarity on the fiduciary issue so there is no further dodging of the fiduciary role by those who have creatively skirted ERISA while continuing to deliver advice. The industry apparently does not want to declare themselves fiduciaries to do what they have been doing for years under the guise of “education.” Education, at the plan sponsor level, is a Trojan horse; it always has been. In an ERISA plan, serving other interests beyond those of participants and beneficiaries is prohibited and always has been. So the sudden industry “shock,” apparently only recently becoming aware of ERISA, is humorous (reminds me of Casablanca).
Knowing that a fiduciary is a steward, why is the industry dead set against stewardship? My speculation is this: the vast majority of the industry that supervises the vast majority of industry salespeople wants them dedicated to that one function only — selling. Somehow, stewardship and sales have a hard time uniting. Sales is usually a systematic process of persuasion, and that can be a lot of fun. Stewardship is a systematic process of prudence — no fun. Yet, I know these two can coexist.
Stewardship requires one thing that sales does not: asking one question at the inception of every transaction — is this the right thing to do? That is all. Not a difficult question to ask, but one that is fraught with risk. Because if the answer is no and the transaction proceeds anyway, well, the obvious needs not be stated.
I suspect corporate risk management is really what this is all about. Industry interests have misstated the truth with a survey, pretended that it represents the desires of business, and that at its heart is nothing more than spin.