PLANADVISER - November/December 2018 - 46

ERISA vista
SEC on Rollovers
The agency says RIAs are fiduciaries
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 accountlevel
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.
46 | planadviser.com November-December 2018 Art by Tim Bower
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