Brokers and advisors have to be ready to immediately correct any violations of the U.S. Department of Labor's rules governing rollovers from retirement assets, Fred Reish, a partner in the law firm of Faegre Drinker, said in a new blog.
Such corrections—including compensating clients who sustain losses because of violations—are not only a requirement, but will also help firms avoid possible enforcement actions, penalties and loss of compensation down the road, he said.
The DOL’s prohibited transaction exemption (PTE) made it clear that “self-correction” is required if firms and their representatives want an exemption from the prohibited conflicts of interest involving rollover recommendations, such as accepting commissions, revenue-sharing and 12b-1, said Reish, who specializes in DOL regulatory issues.
Broker-dealers and RIAs were required to begin adhering to the rule’s impartial conduct standards February 1, but firms are already running into compliance problems that requires self-correction, he said.
“Unfortunately, we are already seeing failures that occurred after the February effective date for most of the PTE’s requirements. Clients are asking for help with understanding the consequences and implementing the processes in the PTE to correct and report the failures,” Reish said.
According to Reish, the types of failures he is seeing include the following:
• Failure to provide retirement investors with a fiduciary acknowledgement.
• Failure to apply the new rules to recommendations to transfer IRAs from other firms to the advisor’s firm.
• Failure to have policies and procedures to mitigate the conflicts of interest of both the firm and its advisors.
• Failure to disclose that plan-to-IRA rollover recommendations and IRA-to-IRA transfer recommendations are conflicts of interest.
“Beyond that, I am concerned that some firms may not realize that, beginning July 1, they need to give retirement investors the specific reasons, in writing, why a plan-to-IRA rollover or IRA-to-IRA transfer is in the best interest of the retirement investor,” Reish said.
The DOL has said that the agency will not deem that a violation occurred if there were not investment losses, but a firm or advisor must make the investor whole if there are losses.
“In other words," Reish said, "the failure to satisfy the requirements in the PTE will cause the compensation earned by the firm and the investment professional to be a prohibited transaction resulting in loss of the compensation and penalties” unless the firm self corrects and follows DOL self-correction protocol.
Neither the PTE nor its preamble adds any detail to the definition of what the DOL will consider an investment loss or ongoing loss that must be made whole, Reish said.