Nearly four months after the SEC announced its Regulation Best Interest, the debate continues about whether the rules do enough for investor protection, especially for IRA rollovers. For advisors, the rules seem vague, and with the Department of Labor looking to potentially revive its fiduciary rule and states stepping into the fiduciary rule-making arena, rollover regulation could get even more complicated.
Reg BI mandates that for any advice given by a broker-dealer to a client pertaining to IRA rollovers, the broker-dealer must have a “reasonable basis” to believe the IRA rollover is in the customer’s best interest “at the time of the recommendation.”
Advisors need to compare both the features of the retirement plan and those of potential IRAs before making a recommendation. The regulator offers a list of factors to use when comparing plans, including investment risks, plan benefits for clients, costs associated with either plan and peripheral services offered by the plans.
However, the SEC says that list is not exhaustive and the relevance of each factor in would vary by investor. This has created some apprehension among advisors who feel that cost will be given undue weight, despite other factors in play.
“What I’m afraid of is that this becomes all about price. And price isn’t necessarily the most important thing,” says Kevin Mahoney, an FT 401 advisor at The Mahoney Group of Raymond James in West Nyack, N.Y.
Kevin Clift, an FT 401 advisor at Dallas' The Clift Group of RBC Wealth Management, agrees. “If you’re doing a comprehensive plan for somebody and give them advice,” he says, “that’s going to cost a little bit more” than somebody with assets in a 401(k) plan.
Other advisors feel there are too many loopholes to allow effective investor protection.
“I think we have let investors down. There are far too many loopholes to get around,” says Karen Casillas, an FT 401 advisor at Captrust Financial in Los Angeles, adding that there is not enough supervision for those “who don’t necessarily do the right thing.”
Enforcement becomes key
But the subjectivity of the rules is exactly why enforcement is key, says Fred Reish, a Los Angeles-based partner at Drinker Biddle & Reath and fiduciary expert. He says the rules will work if the regulator interprets them in favor of investors and enforces them aggressively.
“That’s because the rules are principles-based and vague, meaning that the key is how the SEC enforces them,” he says. “If the SEC has a ‘light touch’ approach to enforcement, the new rules for rollovers won’t make much of a difference.”
But how does the regulator go after those not making the correct recommendations?
John Lukanski, a partner at Reed Smith in Princeton, N.J., says most broker-dealers have mechanisms to capture the source of funds in a client’s account. Through its exams, the regulator can use that information to find cases where rollover recommendations were made and seek any relevant paperwork and comparisons that the advisor undertook while making the recommendation to find out if the advice was indeed in the client’s best interest.
But the DOL's announcement of a potential new version of its fiduciary rule could add another layer of complication.
DOL’s potential fiduciary rule could tighten strings
While there is no clarity on the exact nature and scope of what the proposed DOL rule will cover, experts say the jurisdiction for broker-dealers will remain with the SEC.
“What happens to the money from the broker-dealer side, and the recommendations that the broker-dealer makes, and what happens to the money after it leaves the 401k account, I think is going to be left to the purview of the SEC and Reg BI,” says Lukanski.
According to Reish, the DOL rule may have “teeth” because, as dictated by Erisa, “those rules create private rights of action that participants and plans can enforce.”
“I think that the DOL would like to say that recommendations to take rollovers are fiduciary acts and the recommendation must be prudent and in the best interest of the participant. The wording will likely be similar to what the SEC said in its rule and release, but it will be slightly more demanding. The outcomes could be similar if the SEC is pro-investor in its enforcement. Otherwise, a DOL rule will have a greater impact,” says Reish.
States step in
Even as the DOL looks to come out with its new rules, many states have moved ahead with proposals for enacting their own forms of fiduciary standards -- some more stringent than others and also including IRA rollovers.
Some of these state rules could add to the regulatory burden faced by advisors. For example, the fiduciary rule proposal for the state of New Jersey extends to the “opening of or transfer of assets to any type of account.”
“So that, to me, would cover rollovers,” says Lukanksi. “Fiduciary duty requirement does not apply to those persons already acting in a fiduciary capacity to an Erisa plan, or the accounts used by that plan. But keep in mind that IRAs are not an Erisa account and will be subject to the rule proposal,” adds Lukanski.
And increasing the numbers of regulators may be worrisome to some advisors.
“I think one of the frightening things around Reg BI, the DOL regs and now all these state regulations, is that [what was once] one or two regulators is now potentially thousands of regulators, all with different emphasis, all with different points of view,” says Mahoney.