Outside-IN

Rollovers and retirement plans: The impact of the SEC's new rules

The SEC warns broker-dealers against short-circuiting their analysis of a rollover by quickly concluding an IRA is in the investor's best interest because it has 'more investment options.'

Jun 7, 2019 @ 11:35 am

By Kevin L. Walsh and George M. Sepsakos

The race is on to help shape the Department of Labor's harmonization with the Securities and Exchange Commission's package of advice rules.

The starting gun was fired with the SEC's 3-1 vote on Wednesday to adopt the series of rules that redefine the line between broker-dealers and registered investment advisers and that modify the standards of care and disclosure obligations for broker-dealers and registered investment advisers when they interact with "retail investors."

As a first step, broker-dealers and registered investment advisers need to understand what the SEC package means. Below are short descriptions of some of the key provisions that specifically relate to providing brokerage services or investment advice to those saving for retirement.

(More: SEC releases new details on investment advice reform package)

For broker-dealers and registered investment advisers interacting with retirement plans and plan participants, the SEC package offered clarity in a number of areas.

Significantly, the SEC clarified when broker-dealers are required to comply with Regulation Best Interest when working with retirement plans, plan fiduciaries, and plan participants. The SEC also clarified when registered investment advisers and broker-dealers must furnish the Form CRS when working with retirement plans and individual retirement accounts.

With limited exceptions, plans and plan fiduciaries are not considered "retail investors/customers" under the SEC package. This means that some of the new compliance rules and disclosure rules will not apply to interactions with plans or plan fiduciaries.

However, the SEC package provides more nuanced guidance on interactions with participants themselves. For investment advisers and broker dealers who provide services directly to participants, a close look at the rules is warranted.

(More: Advisers, experts either hate SEC advice reforms or love them)

Another major change made in the final Regulation Best Interest is its treatment of IRA rollover recommendations. Under Regulation Best Interest, not only does a broker who recommends a rollover have to comply with Regulation Best Interest and consider a number of factors outlined in its "care obligation," but the SEC makes clear that in recommending a rollover to an individual retirement account, a broker must consider:

• Fees and expenses.

• Level of service available.

• Available investment options.

• Ability to take penalty-free withdrawals.

• Application of required minimum distributions.

• Protection from creditors and legal judgments.

• Holdings of employer stock.

• Any special features of the existing account.

The SEC warns broker-dealers against short-circuiting their analysis by quickly concluding that an IRA is in the investor's best interest because it has "more investment options."

A third area where there is the possibility of a major impact that could go overlooked by a quick read of the SEC package is the agency's new interpretation of "solely incidental." In its new interpretation, the SEC narrowed the level of discretion and monitoring that a broker-dealer may maintain with respect to a retail investor's account while still being able to rely on the broker-dealer exception to the Investment Advisers' Act's requirements. As a result, broker-dealers may want to review the services they offer to evaluate whether they can still rely on the exclusion.

In addition to understanding the SEC package, broker-dealers and investment advisers may want to begin considering the terms that would be acceptable in DOL's alignment package. Many in the industry would like clarity on how Regulation Best Interest and the new interpretation of "solely incidental" will impact ERISA fiduciary status. DOL can also provide clarity that the SEC did not around preemption over state rules.

Broker-dealers and investment advisers would be well-served by moving quickly to comply with the SEC package. Regulation Best Interest and Form CRS become effective shortly, and the transition period extends only until June 30, 2020. Consumer advocacy groups and others have already signaled that they would like to see these rules challenged in court and/or revisited by future administrations. Unless investment advisers and broker-dealers can show that compliance with the SEC package really does result in "best interest" recommendations and advice, those calls will likely continue.

Kevin L. Walsh and George M. Sepsakos are principals at Groom Law Group.

0
Comments

What do you think?

View comments

Upcoming event

Oct 22

Conference

San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print