PLANADVISER - March/April 2018 - 54

ERISA vista
2018 SEC
Examination Priorities
The regulator wants to protect retirement investors
QUESTION: I provide investment advice to ERISA [Employee
Retirement Income Security Act] plan participants and IRA [individual
retirement account] owners. Based on the 2018 SEC [Securities
and Exchange Commission] examination priorities, what
issues do I need to consider, and how should I address them?
ANSWER: Protecting retirement investors and seniors-
who in many cases are one and the same-continues to be a
priority for the SEC. Based upon that agency's areas of focus,
you should review and update your disclosures to identify
all conflicts of interest, particularly those affecting retirement
investors, and make sure there are appropriate policies
and procedures in place to safeguard their interests.
The SEC's principal priority for 2018 examinations is
" protecting retail investors, particularly seniors and those
savings for retirement, and pursu[ing] examinations of
firms that provide products and services directly to them. "
While the SEC and the Department of Labor (DOL) share
the same objective of protecting retirement investors, they
each address this goal in different ways. Unlike the DOL,
the SEC does not generally characterize financial conflicts
of interest as " prohibited. "
Instead, the SEC's focus is on disclosing such conflicts
and whether advisory practices appropriately address them.
As stated by the SEC: " It is also important for financial
professionals to inform investors of any conflicts of interest
that might provide incentives for the financial professionals
to recommend certain types of products or services to
investors, including any higher cost or riskier products. "
While the examination priorities do not specifically
mention recommendations of distributions and rollovers,
these are the most important services that can be provided
to retirement investors, given how those recommendations
potentially can affect their lives. In fact, we are seeing
SEC examinations of distribution/rollover recommendations
made by broker/dealers (B/Ds) and registered investment
advisers (RIAs) to plan participants. FINRA [Financial
Industry Regulatory Authority] and the DOL are also looking
into these activities.
Adviser communications with retirement investors about
distributions and rollovers fall into two categories: education
and recommendations. Policies and procedures are
needed to support and oversee both. For example, in the case
of a distribution/rollover recommendation, the policies and
procedures should address the need to gather information
about the plan's investments, expenses and services and
compare those with the investments, expenses and services
in, for example, a proposed IRA, based upon the investor's
investment objectives, financial circumstances and needs.
For education, the policies should cover the communications
that do not rise to the level of being recommendations.
Whether the adviser provides educational activities or a
recommendation, supervisory controls should be in place to
oversee the implementation of the policies. Advisers should
also consider that a distribution/rollover recommendation
results in a conflict of interest if the adviser receives additional
compensation as a result of the recommendation-
i.e., the IRA advisory fee. This conflict of interest should be
disclosed in the Form ADV Part 2A.
The SEC is particularly focused on the " increased risks "
of inadequate disclosure, including " advisers that changed
the manner in which fees are charged from a commission
on executed trades to a percentage of client assets under
management [AUM]. " And it's not the only agency concerned
about this conflict of interest. The DOL considers such
recommendations a fiduciary act that results in a conflict
of interest if the adviser receives additional compensation
as a result of the recommendation. Also, FINRA, in its 2018
examination priorities, noted its intention to review registered
representatives' recommendations to switch from a
brokerage account to an advisory account where that switch
clearly disadvantages the customer.
Given this heightened scrutiny by all three agencies,
advisers should insure they have policies and procedures in
place that support compliant recommendations of account
changes from commission-based to advisory fee. More
specifically, the policies should describe the process that
advisers should use in determining whether the recommendation
is acceptable for the retirement investor. We know of
an examination where the SEC took the position that any
recommendation to move from a commissioned account to
a fee account within 24 months of the commission payment
should be closely scrutinized.
In conclusion, the SEC, the DOL and FINRA all appear to
be circling some conflicts of interest. Advisory firms should
be aware that conflicts of interest and DOL prohibited transactions
(PTs) are similar, if not identical.
Fred Reish is chair of the financial services ERISA practice at the law
firm of 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 Internal Revenue
Service 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.
54 | planadviser.com march-april 2018 Art by Tim Bower
http://www.planadviser.com
PLANADVISER - March/April 2018

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