Broker-dealers need to consider using monitoring services if they are recommending riskier products to retirement plan investors under exemptions allowed by the U.S. Department of Labor, said Fred Reish, a leading compliance attorney at the law firm of Faegre Drinker.

Firms and their professionals who are offering what the rules terms “non-discretionary” fiduciary services could have more responsibility than anticipated when it comes to the need for monitoring complex or risky investments, Reish said in a new blog.

“So, from the DOL’s perspective, monitoring is not generally required. But, if a complex or risky investment is recommended to a retirement investor, and the retirement investor lacks the ability to monitor the investment without help, the advice fiduciary should clearly explain the need for monitoring to the investor when making the recommendation.’” Reish noted.

The DOL said "such monitoring could be performed by a third party, but the advice fiduciary should clearly explain the need for monitoring to the investor when making the recommendation.”

The new rules, “right or wrong, are designed to protect the financial security of retirement accounts, including IRAs. As a result, investment professionals and financial institutions should consider whether some investment recommendations could require monitoring and whether those recommendations should be made and, if so, how they will be monitored,” Reish warned.

The overall rule, which went into effect last February, allows a broad range of financial firms and their reps to receive conflicted compensation when they make non-fiduciary investment advice, including rollover recommendations to retirement plans, participants and IRA owners, provided they follow the new requirements.

Firms and advisors who have discretionary authority over their clients’ assets obviously have a monitoring obligation, Reish said.

But for those who instead want to offer “non-discretionary financial advice” to retirement investors, the DOL’s rules leave it up to the prudence of the firm or rep, he said.

The rule states that the DOL "expects that financial institutions and investment professionals will consider whether the investment can be prudently recommended without some mechanism or plan for ongoing monitoring.”

The agency did not provide examples of what, in their view, constitutes a risky or complex product.

“In response to requests for guidance identifying specific products that will require monitoring, or what constitutes a product of unusual complexity and risk, the department notes that financial institutions and investment professionals will need to make these decisions on a case-by-case basis. The department expects that [they] have the expertise necessary to evaluate the need for monitoring based on all the facts and circumstances,” the agency said.

Yet, the investment professional and financial institution do not need to provide those monitoring services, Reish said. “Practically, that doesn’t seem realistic, because it assumes that an investment professional will put a retirement investor into an investment that the investor lacks the ability to monitor and, in connection with the recommendation, the investment professional will tell the retirement investor to find someone else to do the monitoring,” he said.

Simply put, “if an investment professional doesn’t want to be in that position, the investment professional shouldn’t recommend complex or risky investments to retirement investors who lack the skill to monitor the investment. That appears to be the only alternative,” Reish added.

The requirement only seems to apply to products of unusual complexity and risk, he added.

“But, unfortunately, the DOL didn’t define those terms or provide examples. ... In my view, most highly complex or risky investments would likely be investments that are not liquid, not transparent, and volatile. However, the DOL has recently issued guidance suggesting that cryptocurrencies could fall in that category. I suspect, though, that we will only learn which investments fall in the latter category after large losses are sustained and claims are filed."

The legal lesson of this story is “forewarned is forearmed,” Reish said. “Where retirement money is invested in products of unusual complexity and risk—and large losses occur there is a potential for litigation even without the language in the DOL’s rule.”