PLANADVISER - July/August 2019 - 52

ERISA vista
The SEC's Standard
On IRA Rollovers
Advisers must act in investors' best interest
QUESTION:
I'm an investment adviser who provides ongoing
advisory services to individuals. In many instances, I advise
clients about IRA [individual retirement account] rollovers. Under
rules of the Securities and Exchange Commission (SEC), what
standard of conduct applies to this IRA rollover advice?
ANSWER: The SEC's recently issued Interpretation
Regarding Standard of Conduct for Investment Advisers
clarifies that investment advisers have a duty to provide
advice that is in the best interest of the client. In the case
of rollovers, that best interest duty applies
not only to the advice about the investments
or investment strategy for the rolled
over assets but also to the advice about the
type of account the assets are rolled into.
The SEC interpretation affirms and
clarifies
an investment
adviser's
fiduoffered.
Even if you are not dually licensed, you must consider
all account types in determining the type that best meets the
particular client's needs.
If an advisory account is not in the client's best interest,
then you will need to acknowledge that to the client, with
the recommendation to consider a nonadvisory account,
even though these are offered only through a broker/dealer.
This may be a surprise to some advisers.
If you have an ongoing advisory relationship with the
The SEC
ciary duty. It does not impose any new
duty on advisers. However, it does provide
additional guidance about what advisers
should do to fulfill their fiduciary duties.
The fiduciary duty applies to all client relationships-regardless
of whether the client
is an individual or an institution. While
there are two components of the fiduciary
duty-a duty of care and a duty of loyalty-
the overarching one is to act in the best
interest of the client.
What does this mean in the context of rollover advice?
The SEC explains that you must make a reasonable inquiry
into a client's investment objectives. For an individual, this
means understanding the client's financial situation, level
of financial sophistication, investment experience and
financial goals.
Then, based on that information, and considering other
factors such as the client's risk tolerance and costs of the
alternatives, you will need to assess whether rolling over
assets from a retirement plan into a new or existing IRA
managed by you best serves the client. Again, this applies to
advice about investments and account type for the rollover.
If you're an associated person of a broker/dealer (B/D)
and a supervised person of a registered investment adviser
(RIA)-i.e., you're dually licensed-you will need to consider
all types of accounts offered, both brokerage and advisory,
and recommend the one that is in the best interest of that
client. The SEC explains that it doesn't matter whether you
work for a dual registrant, affiliated firm or unaffiliated firm.
In any of those cases, you must consider all types of accounts
explains that
you must make
a reasonable
inquiry into
a client's
investment
objectives.
client, the SEC interpretation confirms that, during the
course of the relationship, you have a duty
to monitor. This duty encompasses all
advice you provide, including an evaluation
of whether the account type you recommended
continues to be in the client's best
interest. The SEC points out that advisers
may find it appropriate to adopt policies
and procedures relating to monitoring, to
address this duty.
While the SEC interpretation doesn't go
into detail about the process for developing
a rollover recommendation, the agency's
Regulation Best Interest (Reg BI) does
describe the information to be considered.
And it's safe to assume that the standard of
care for RIAs is not lower than the standard
for broker/dealers. Included in the information
Reg BI says to consider are: how the participant's
account is invested and the costs and services in the plan.
In sum, you need to obtain sufficient information about
the investment objectives and financial needs of the client
so you can act in his best interest in providing advice about
whether the account should be distributed from the plan, the
investments to be recommended for the rolled over assets,
and the type of account to roll them into. Additionally, for
ongoing advisory relationships, you'll need to monitor that
account type and evaluate whether it continues to serve the
client. You should review your policies and procedures to
insure they address this fiduciary duty.
Fred Reish is chairman of the financial services ERISA [Employee
Retirement Income Security Act] 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.
52 | planadviser.com July-August 2019
Art by Tim Bower
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