The first deadline for firms to submit their annual retrospective review detailing their compliance with the Department of Labor’s rollover recommendations regulation is today, and while most larger firms are meeting the spirit of the regulation, some firms, especially smaller shops, are still struggling, a group of compliance experts said during a panel discussion.
The prohibited transaction exemption allows investment fiduciaries to provide rollover advice to investors with retirement plans and IRAs and receive otherwise prohibited compensation, provided the advisors comply with DOL requirements.
The annual retrospective report that firms must be filed by either June 30 or July 31, depending on their reporting cycle.
The biggest challenge for firms is disclosing and documenting their fees and conflicts of interest, said Parham Nasseri, vice president of product and regulatory strategy at InvestorCom, a regulatory compliance and communications solutions firm that sponsored the panel discussion.
Some 38% of broker dealers and advisor firms said they are struggling to meet disclosure and documentation requirementsin an InvestorCom survey, which will make analyzing existing policies and practices for the retrospective more challenging, Nasseri said.
Some 21% of firms said they are having difficulties assessing investors’ existing plan fees before making recommendations to rollover balances, so a reasonable comparison of fees and performance and deliberations of whether a transfer is in the best interest of investors—also needed for the review—becomes more difficult, especially considering that most firms are still attempting to analyze a year’s worth of their advisors’ rollover recommendations manually, Nasseri said.
Theresa Manderski, regional vice president and chief compliance officer at Davenport & Co., a regional broker-dealer, said her firm has been working on its annual retrospective report for more than a year.
“We started ours a little early and have looked at written supervisory procedures around rollovers, policies and disclosures, whether our folks are complying with the impartial conduct standard, how they’re communicating to clients. This isn’t a one-and-done exercise. You need to look at all these factors on an ongoing basis to make sure they’re up to date,” Manderski said. “We had items that needed to be updated."
The chief compliance officer also said her firm is using its SEC Regulation Best Interest disclosures to provide information to clients, so they receive standardized information about the firm, including their material conflicts of interests.
“How do you provide your disclosures? How do you provide your material conflicts? ... Do you have documentation this was communicated to clients? How do you susbstantiate the information was sent?” she asked.
“We looked at how many rollovers we had in a year and selected a sample size to write about. We looked at new rollovers, new accounts and rollovers received into existing accounts. And then we said, how would we determine best interest? So we looked at factors such as age, account size, compensation. We also verified that forms used by advisors were completed correctly and made sense and had right disclosures,” Manderski said.
While the DOL does not prohibit advisors from recommending rollovers into higher-cost investments, there should be analysis and explanation accompanying such recommendations, Nasseri said.
Manderski said if advisors made a higher cost recommendation, her firm wants to see notations that explain why and why the rollover is in the client’s best interest.
She said that Davenport found while writing the report that clients’ Form 5500, detailing the costs associated with their existing firm, were not being used by all advisors in the field.
That meant more training and communications to advisors, so that if they didn’t receive plan information, they send clients notes asking for the information and describing why it was needed. It also meant documenting the improvements in training and client communication in the retrospective report.
“We use an automated system to track and monitor. If money shows up magically in an account there is a limited amount of time before we’ll restrict account if we don’t get an explanation,” Manderski said.
If firms find that rollovers don’t meet a client’s best interest and the letter of the DOL exemption, the client needs to be made whole and such instances may need to be self-reported to the DOL, she said.
“If there are losses, you have to make client whole within 90 days of the issue being identified and have to report to the staff doing the firm’s retrospective review,” said Ed Wegener, managing director of Oyster Consulting LLC.
“The DOL has provided an exemption. If you blow it, you can’t avail yourself of the exemption and make rollover recommendations, so you have to make sure you’re treading carefully,” Wegener added.
As for self reporting, Candy Palugi, a senior consultant at Oyster Consulting LLC, said, “Go back to the rule and dig in to get comfortable with what you need to self report or not. Make sure you provide good records about what you’ve done to address any issue that arises and why you decided it didn’t need self-reporting. If you found an error, detail what needs to be modified and whether or not it needs new training. Do you have process that is repeatable or is it arbitrary?”