On a bright note, state securities regulators may have listened to FSI and industry requests to allow Reg BI to take effect before they created their own state-by-state patchwork of varying best interest regulations. The North American Securities Administrators Association (NASAA) just sent a Reg BI survey to all its regulated firms and professionals to assess how the rule is working, says Traxler, who adds, “We hope they give Reg BI an opportunity to work.”
The DOL Is Back
While the industry watches the SEC, some of the toughest challenges for advisors and broker-dealers are coming out of the Department of Labor, which is overseen by a politician who was never a regulator—the newly minted U.S. labor secretary and former two-term Boston mayor Martin J. Walsh.
The DOL’s bench will get deeper if Biden’s nomination to head the DOL’s Employee Benefits Security Administration, Lisa Gomez, is confirmed. She has extensive experience as an attorney working with retirement plans and ERISA, which would help the Labor Department enforce its rules and create new ones, which it has promised to do.
The DOL challenge for advisor firms, broker-dealers and insurance brokers is the agency’s approval of the Trump-era fiduciary rule, which expands the fiduciary duty for advisors handling retirement plans and IRA rollovers. These transactions have historically been treated as a onetime, nonfiduciary service. The rule took effect February 16, but the Treasury and the IRS are deferring compliance with the new rules until December 20 as long as “impartial conduct standards” are met.
“Much to the surprise of almost everyone, the Biden administration allowed it to become a final rule,” says Fred Reish, a partner at Faegre Drinker and one of the most renowned fiduciary experts in the country. “Then the DOL regulatory agenda was released in July and there was an agenda item that said they will revisit the fiduciary regulation and issue new proposals in December of this year.”
The new rule, called “Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees,” says that if a financial professional makes a rollover recommendation from which he or she is going to benefit, the professional can only achieve an exemption from fiduciary duty if certain conditions are satisfied.
“Some of the exemptions are burdensome and they even apply when an advisor recommends that an investor roll over one IRA into another,” says Reish, who is working with advisory firms, broker-dealers and insurers to help them be compliant by December 21, when the DOL’s nonenforcement field bulletin expires and the agency can start cracking down on alleged violations.
The fact that a rollover from an IRA to another IRA is now a fiduciary recommendation in and of itself “will be a shock to many firms,” Reish says.
“I would suspect that every firm does IRA to IRA rollovers, but this has not been well publicized,” he says. “The recommendation is now a fiduciary recommendation, which requires an analysis of the IRA as it currently exists versus costs and investments and services you will provide with the rollover. IRA holders also need to receive a statement detailing why the rollover is in the holder’s best interest.”
Firms need “policies and procedures to mitigate conflicts of interest, which is not a familiar concept for broker-dealers and insurers,” Reish says. “Each year, firms also need to create and file a retrospective review of how [they] met the requirements, which has to be signed by a firm executive. How will firms with two or three advisors be able to meet this requirement?