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.
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.
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.