Financial institutions’ policies and procedures must also include supervisory oversight of investment recommendations…and provide for increased monitoring of recommendations at or near compensation thresholds, recommendations at key liquidity events for investors such as rollovers, and recommendations of investments that are particularly prone to conflicts of interest, such as proprietary products and principal-traded assets.

One approach is for financial institutions to design their reward programs with smaller incremental steps for qualification for rewards and with more limited benefits for reaching each of those incremental steps–and then to have enhanced supervision as the investment professionals approach the incremental qualifying levels, Reish suggested.

“Relatively minor payments or benefits would be less likely to incent a recommendation that is not in the best interest of a retirement investor and, as a result, the mitigation efforts need not be as demanding,” Reish said. 

There are, however, conflicts that cannot be mitigated by levelizing compensation or reducing the differences in compensation, he said. One example is a plan-to-IRA rollover recommendation. If the retirement investor accepts the recommendation, the firm and the investment professional will be compensated from the rollover IRA, but if the retirement investor does not, the firm and the investment professional will not make any money, he said.

In these cases, “the first line of ‘defense’ is to have a well-defined and documented process for evaluating the relevant information and making an informed and reasoned decision in the best interest of the retirement investor. Then those recommendations could be subject to heightened supervision,” Reish suggested.

While there is little direct guidance on how to mitigate these “all or nothing” recommendations, “it seems likely that the strength of the process (including the information reviewed and considered as a part of that process) and the degree of supervision will be important elements of mitigation,” he said.

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