PLANADVISER - Spring 2023 - 37

described fee arrangements may cause prohibited transactions,
they may be permissible if the adviser complies with a
prohibited transaction exemption.
Department of Labor Prohibited Transaction Exemption
2020-02 provides exemptive relief and will allow many otherwise
prohibited fee arrangements when a fiduciary gives
advice. In the case of a discretionary account, a number of
other exemptions may apply, though the adviser firm will
have less flexibility as to how it and its affiliates may be paid.
Finally, advisers that provide discretionary management
or investment advice services to a plan or participant(s) in the
plan may wish to recommend that a participant take a distribution
and roll that amount into an IRA where the manager
may provide discretionary or advice services. The DOL is of
the view that the adviser acts as a fiduciary when making
such a recommendation. Compliance with PTE 2020-02
addresses compensation conflicts that the adviser may face
in making that recommendation. -David Kaleda
More Compliance to Consider
Wealth Managers'
Understanding
Of Fiduciary Requirements
In the reverse of plans' wealth managers
looking to service participants' outside
investments, the managers of individuals'
taxable accounts and individual
retirements accounts increasingly have
an eye on servicing their clients' plans.
Indeed, many mergers and acquisitions
have been performed for this reason.
Wealth managers that act as a plan
fiduciary should understand how to
comply with the fiduciary duty provisions
of the Employee Retirement
Income Security Act, Section 404(a).
ERISA's fiduciary duty provisions
apply to fiduciaries of private-sector
employer-sponsored benefit plans,
though not to government-sponsored
plans or nonelecting church plans. They
also do not apply to IRAs. A wealth
manager can be a fiduciary under ERISA
with respect to a brokerage account or
an advisory account.
Section 404(a) requires that the plan
fiduciary 1) discharge his or her duties
as a prudent expert would under similar
circumstances-duty of prudence; 2)
discharge those duties solely in the
interest of the participants and beneficiaries-duty
of loyalty; 3) diversify the
plan investments to minimize the risk
of large losses; and 4) act in accordance
with the governing plan documents.
Failure to comply can result in the fiduciary's
personal liability to the plan.
The necessary expertise to advise
a plan differs from that required for a
participant client or IRA-holder. The
wealth manager must consider all
relevant factors such as plan demographics,
plan type-e.g., 401(k) vs. cash
balance-and the plan's liquidity needs.
To satisfy the duty of loyalty, the
adviser must act exclusively in the
interest of all of
the plan's participants
and beneficiaries, not favor client
participants. Disclosing conflicts is
insufficient to meet the duty of loyalty.
Further,
ERISA
allows
participants
to sue plan fiduciaries for breach
of fiduciary duty; it focuses on the
process whereby the fiduciary gathers
appropriate facts and information
to make a reasoned determination
within the aforementioned standards.
This
is called " procedural prudence. "
Reg BI Risk Alert
The Securities and Exchange Commission
Division of Examinations recently
issued a Risk Alert, " Observations From
Broker/Dealer Examinations Related
to Regulation Best Interest. " The alert
demonstrates that many firms have
yet to establish policies and procedures
that fully comply with the regulation.
SEC staff notably found deficiencies
in meeting the " disclosure care, "
" conflict of interest " and " compliance "
obligations as Reg BI and the alert define
them. To summarize:
* Firms still heavily relied on their
pre-Reg BI policies and procedures,
which had not been changed at all or
not enough.
* Firms failed to properly address
conflicts of interest. Some merely
disclosed the conflicts vs. establishing
policies and procedures to mitigate
them. Other firms had policies and
procedures only for some of the conflicts
the regulation cited. Some disclosures
of conflicts were too generic.
* Policies and procedures failed
to detect and promptly correct violations
of Reg BI's new obligations, which
involve rollover, account and implicithold
recommendations.
* Surveillance systems were inadequate
to monitor Reg BI compliance.
* The practice of posting required
Reg BI disclosures on a website or using
documents such as account agreements
to notify customers of where the disclosures
could be found failed to meet the
disclosure delivery requirements.
* The training of firm represenobligations,
tatives
on
the Reg
BI
including the resolution of violations,
was inadequate.
* The firms lacked policies and
procedures to properly disclose the
capacity in which representatives
act when they have multiple licenses
and the conflicts of interest that
arise when representatives have only
certain licenses.
Reg BI for many B/Ds requires a
substantial rethinking of how their
firm approaches assuring that recommendations
are in a customer's best
interest. Further, firms should recognize
that other regulators, such as the
Department of Labor, likely are taking
notes on the SEC's findings. -DK
David Kaleda is a
principal in the fiduciary
responsibility
practice group at
Groom Law Group,
Chartered, in
Washington, D.C.
Participants | Spring 2023 | planadviser.com 37
http://www.planadviser.com
PLANADVISER - Spring 2023

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