“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.”