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DOL Rollover Guidance Expected After SEC Releases Reg BI

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The Labor Department will propose in the summer or fall of this year — after the Securities and Exchange Commission finalizes its Regulation Best Interest for brokers — guidance on when a rollover recommendation constitutes fiduciary advice, as well as an exemption for compliance with Reg BI, attorneys at Stradley Ronon predict.

The attorneys, part of Stradley Ronon’s Fiduciary Governance Group, write in their Jan. 7 blog post, “A Fiduciary’s 2018 Retrospective (and Predictions for 2019),” that given the fact that Labor’s fiduciary rule was vacated, the original five-part test now determines whether an advisor is an investment advice fiduciary under the Employee Retirement Income Security Act.

“We expect that the DOL will issue interpretive guidance, and propose exemptive relief, in the summer or fall of 2019” that will “most likely address the circumstances under which rollover recommendations constitute fiduciary investment advice,” the attorneys, including David Grim, the former director of the SEC’s Division of Investment Management, write in their Risk & Reward blog.

The proposed Labor exemption, meanwhile, “will probably apply to services and products that the DOL views as presenting fewer conflicts of interest, one of the conditions being adherence to the final form of Regulation Best Interest.”

While the attorneys state that they can’t “completely predict whether multiple exemptions will be proposed, we can say, with some level of confidence, that the DOL is quite unlikely to modify the five-part test for when one becomes an investment advice fiduciary. We do not think the DOL has the appetite or bandwidth to do that.”

The attorneys believe that Reg BI will be finalized “this spring — or fall at the latest — largely intact. We would not be surprised if the SEC opted to provide examples of how firms can meet their best-interest duties, while still avoiding the rhetorical exercise of trying to define them.”

George Michael Gerstein, a member of the Fiduciary Governance Group, told ThinkAdvisor separately that the SEC may be “collaborating with, and be getting input from, the DOL and even the states” on Reg BI.

The SEC opted not to define “best interest,” the attorneys write, “and this omission has largely dominated the discussion over the entire proposed package. The proposed best interest standard is, in fact, not a fiduciary standard, such as the one imposed on investment advisers” under the Investment Advisers Act of 1940.

Rather, the “suitability-plus standard” includes “enhanced disclosures and a requirement to mitigate or eliminate certain conflicts of interest.”

For instance, Reg BI requires the broker-dealer to establish, maintain and enforce written policies and procedures reasonably designed to identify and then to, at a minimum, disclose, or eliminate, material conflicts of interest associated with the recommendation; and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with the recommendation.

As for states complicating the process by making their own rules, “we expect most states will await final rulemaking from the SEC and the [National Association of Insurance Commissioners], and only then propose and promulgate regulations directly or indirectly imposing uniform standards of care,” the lawyers write.

“We do not expect many other states, besides the ones already mentioned [New Jersey, New York, Nevada and Maryland, among others], to be involved (with one or two exceptions). While regulations may face better odds than legislation, they also remain vulnerable to court challenge that the regulator acted beyond its powers. This means that litigation both by, and against, the states involved, such as New York and potentially New Jersey, will likely characterize state activity regarding broker-dealer and investment adviser standards of conduct in 2019.”

— Check out SEC’s 6 Compliance Exam Priorities for RIAs in 2019 on ThinkAdvisor.


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