Broker-dealers and registered investment advisors are already requesting legal advice on how they can correct violations of a new U.S. Department of Labor rule that determines how they give advice on retirement rollovers, said Fred Reish, a partner in the law firm of Faegre Drinker, during the firm’s “Inside the Beltway” webinar in mid-August.
“I already have three clients who have come to me and said ‘Fred, some of our advisors accidentally didn’t satisfy all the conditions. How do we fix it?’ I’m working with them to prepare to fix it and to prepare the submission to the Department of Labor,” Reish said.
The DOL rule says advisors who want to recommend retirement fund rollovers in which they will receive commissions, revenue-sharing or 12b-1 fees must apply for an exemption to demonstrate that the rollover is in the client’s best interest (a rule in force as of February 1, 2022). They must follow impartial conduct standards and "self-correct" any violations in their recommendations if they want an exemption from these prohibited conflicts, said Reish, who specializes in DOL regulatory issues.
Such corrections—including compensating clients who sustain losses because of violations—are not only a requirement, but will help firms avoid possible enforcement actions, penalties and loss of client compensation down the road, Reish said.
“What I’m actually seeing is that most broker-dealers and investment advisors, except for the very small ones, have done a pretty good job of getting everything in place at the firm level. The problems I’m seeing are at the advisor level. Trying to take something this big and this different and push it down to hundreds of thousands of advisors across the country is a real challenge,” Reish said.
“If any mistakes are found—for instance an advisor didn’t provide a fiduciary acknowledgement or an advisor didn’t engage in the best interest process or an advisor didn’t review plan information in making a rollover recommendation—those are all failures to satisfy the terms of the exemption," he said. That means any clients who suffer losses as a result of the violations need to be compensated, with interest, he added.
One issue with self-correction is that the process “is not well defined” by the DOL, Reish added.
That sentiment was echoed by Bradford Campbell, a partner at Faegre Drinker and former assistant secretary at the DOL. “There is real ambiguity regarding what the DOL thinks a self-correction should look like. What will DOL say when they start doing investigations?” Campbell asked.
One possibility is the agency will refrain from hard-core enforcement since it has promised to propose a new rollover standard by year’s end, Campbell said. But not knowing has been hard on firms.
One failure Reish is seeing is advisors not providing retirement investors with written reasons why their recommended rollovers are in their best interest.