Advisors have until December 21 to comply with the U.S. Department of Labor’s new fiduciary requirements when offering rollover investment recommendations. But firms affiliated with broker-dealers will actually need to act much sooner, according to securities attorney Fred Reish.
That's because the DOL has already set the compliance ball rolling by arming investors with questions they should ask advisors to ensure they're acting in their interest when issuing rollover advice, he told Financial Advisor.
“The proposed questions accelerate the need to make decisions about compliance and to address those issues now, when many financial institutions are still grappling with understanding the rules and deciding what compliance steps to take,” said Reish, a partner in the global law firm Faegre Drinker.
The eight questions are laid out in “Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts,” a Q&A information release that was recently issued by the DOL. (https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/choosing-the-right-person-to-give-you-investment-advice).
The questions that the DOL wants investors to pose (and wants advisors to answer) include, “Are you a fiduciary under the federal laws specifically applicable to retirement accounts when you give me investment advice for my retirement account?”
The questions put pressure on firms to accelerate their response to new DOL rules that allow fiduciary advisors to accept commissions and other prohibited compensation without triggering ERISA violations when they offer advice on rollovers, Reish said.
Reish said that while the DOL’s suggested fiduciary questions will be posed to advisors, the actual decisions about how a firm wants to satisfy the conditions will need to be made by broker-dealers. “As a result, some broker-dealers, and other financial institutions including investment advisory firms, may decide to prepare written answers to those questions so that their hundreds or even thousands of investment professionals are giving the same answers to the same questions. That is an issue that financial institutions will need to deal with now—rather than December 21st—due to these questions,” Reish said.
Other questions the DOL suggests that investors ask their prospective or current advisors include:
• Can I have a written statement that you are a fiduciary under the federal laws specifically applicable to retirement accounts? (And if not, why not?)
• Are you and your firm complying with the Department of Labor’s exemption. ... Do you believe that you do not have any relevant conflicts of interest?
• What fees and expenses will I be charged? Will you give me a list of those fees and expenses, and explain what each pays for? Do I pay all of them directly to you or are any taken out of my investments?
Reish said he is currently helping a number of broker-dealers comply with the complexities of the rules and that his experience is that broker-dealers are developing implementation plans with the Dec. 21 deadline in mind.
“However, several of the [DOL’s] questions are worded as if those rules were already in effect. As a result, advisors will need to closely coordinate with their broker-dealers to determine whether and how they can answer these questions. For example, it is possible that a broker-dealer will agree to make written declarations of fiduciary status at this time, even though it’s not [officially] required,” Reish said.
While the DOL did not formally change the date that nonenforcement ends, the agency said it intends to revisit the new exemption rules, called PTE 2020-02, and other exemptions relating to investment advice. “The department anticipates taking further regulatory and sub-regulatory actions, as appropriate, including amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking some of the other existing class exemptions available to investment advice fiduciaries,” the agency said in the Q&As.