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The SEC on Rollovers.

Byline: Fred Reish and Joan Neri

Art by Tim Bower

ADVISER QUESTION: I’m an RIA [registered investment adviser] who works with a few retirement plans, and I know what the DOL [Department of Labor] says about recommending rollovers, but most of my work is wealth management for individuals, including their IRAs [individual retirement accounts]. What is the SEC [Securities and Exchange Commission]’s position on recommending rollovers?

ANSWER: The SEC says that an RIA is a fiduciary with duties of loyalty and care. That applies to all advice, including recommendations to take money out of a plan and roll it into an IRA with the adviser. To satisfy the duty of loyalty, the RIA must disclose conflicts of interest, including conflicts resulting from rollover recommendations. To satisfy the duty of care, the RIA should have policies and procedures for rollover recommendations that support the collection and evaluation of relevant information about the plan and proposed IRA and the assessment of whether the rollover aligns with the client’s profile.

The SEC’s position on rollover recommendations is most evident in its recent proposed interpretation for RIAs and its proposed Regulation Best Interest (Reg BI). While the RIA Interpretation is nominally a proposal, it reflects the commission’s current interpretation of the rules, that agency says.

Under the RIA Interpretation, all advice to clients--including rollover advice--is fiduciary advice subject to a duty of care and a duty of loyalty. The duty of loyalty is satisfied, in part, through disclosure requirements. The SEC indicates that rollover recommendations are conflicts of interest, which means that the conflict should be disclosed. This is because an adviser receives additional compensation--i.e., the IRA advisory fee--if the money is rolled to an IRA.

The SEC explains that the fiduciary duty of care is a “best interest” standard of care. The RIA Interpretation specifically applies that standard to rollover recommendations for both Employee Retirement Income Security Act (ERISA) and non-ERISA retirement plans.

That leads to the question: What is the SEC’s best interest standard of care for rollover advice?

While the RIA Interpretation does not define the best interest process for rollover recommendations, it does list a number of relevant factors. These include the cost of investments and services, and consideration of how those factors align with the investor’s financial needs and objectives. In Reg BI, the SEC provides more specific guidance by referencing Financial Industry Regulatory Authority (FINRA) Regulatory Notice 13-45.

Notice 13-45 also lists variables that should be considered in recommending a rollover, including a comparison of the investments, services and expenses under the plan and the IRA. Looked at together, this guidance suggests that the SEC expects advisers to develop a process similar to the one described in Notice 13-45. In addition, the SEC has, in the past, specifically referenced Notice 13-45 when discussing RIA rollover advice.

In developing a compliant process, advisers should consider the types of information the SEC asks for during an investigation. Listed below are requests we have seen:

• Please identify policies and procedures relating to the issues noted in Notice 13-45 regarding rollovers to IRAs.

• Provide a description of any training provided to personnel regarding the firm’s retirement account rollover policies and procedures.

• Provide a list of all customer qualified accounts--for example, IRA and 403(b) accounts--held at the firm, including the source of funds; please specify the entity/account the funds came from and if it was a liquidation or rollover of retirement assets.

• Provide any written disclosures and scripts used during the past six months regarding: 1) distribution options--i.e., maintaining assets in a former employer’s plan, transferring assets to a new employer plan, rolling assets over to any IRA, or taking a lump-sum distribution--the tax implications of these options, and other considerations; 2) conflicts of interest or financial interests that the firm or its representatives have in recommending any specific product or account type; and 3) the various types of account options available to clients--i.e., IRA rollover clients--including the account-level fees and expenses, as well as services provided.

In sum, to satisfy SEC fiduciary standards, advisers should adopt specific policies and procedures governing rollover recommendations. The procedures should address the collection and evaluation of relevant information about the plan and the proposed IRA and evaluation of whether the rollover recommendation aligns with the client’s needs, investment objectives and risk tolerance. To support this process, RIA firms should provide training to advisers with regard to client communications.

Fred Reish is chair of the financial services ERISA practice at law firm Drinker Biddle & Reath LLP. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on ERISA, pension plan disputes and audits by the IRS and Department of Labor. Joan Neri is counsel in the firm’s financial services ERISA practice, where she focuses on all aspects of ERISA compliance affecting registered investment advisers and other plan service providers.
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Publication:PLANADVISER
Date:Dec 1, 2018
Words:917
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