Le Prix De Cialis en France Cuál Es La Mejor Viagra O Cialis Farmacia Meritxell Cialis

Viewing a Retirement Plan Rollover Case Via the Prism of Regulation Finest Curiosity

As set forth in FINRA Regulatory Notice 13-45, FINRA’s Rule 2111 suitability standard generally applies to recommendations to rollover assets from an employer-sponsored retirement plan to an IRA if the rollover involves a securities transaction. For broker-dealers, the standard has now changed with the adoption of Regulation Best Interest, 17 C.F.R. § 240.15l-1. The U.S. Securities & Exchange Commission (“SEC”) has stated that the best interest standard applies to account type recommendations, which includes “recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA).” See SEC’s Adopting Release No. 34-86031 (June 5, 2019), 84 FR 33318, (the “Adopting Release”).

In a recent SEC regulatory matter, In the Matter of TIAA-CREF Individual & Institutional Services LLC, Administrative Proceeding File No. 3-20392, a subsidiary of the Teachers Insurance and Annuity Association of America (the “Firm”), agreed to pay $97 million to settle charges of misleading statements and inadequate disclosures relating to rollover recommendations to participants in TIAA record-kept employer-sponsored retirement plans. It is important to note that this was an investment advisor case involving rollovers to a fee-based advisory account and alleged violations of Section 17 of the 1933 Securities Act, Section 206 of the Investment Advisers Act of 1940, and Advisers Act Rule 206(4)-7. However, the underlying allegations provide a useful framework to review Regulation BI’s four core obligations and how regulators may view misleading statements, inadequate conflict disclosures, and rollover recommendations that are alleged not to be in the best interest of a retail customer.

Regulation BI’s Disclosure Obligation

What Happened in TIAA: During conversations with clients, some advisors represented that they were “fiduciaries” and provided “objective” and “non-commissioned” investment advice regarding recommendations to rollover retirement assets into a wrap-fee managed account program called “Portfolio Advisor.” Those oral disclosures were not true, however, because the Firm provided higher compensation to its advisors with respect to rollovers into Portfolio Advisor compared to other alternatives and the Firm did not treat or review rollover recommendations under a fiduciary standard.

Other advisors represented that rolling retirement assets into Portfolio Advisor was the only option, which was false, and in fact the Firm’s policies required advisors to present additional, alternative options. Finally, the Firm had provided training to advisors to avoid disclosing fees associated with the rollover recommendations.

Takeaway: The Disclosure Obligation, 17 C.F.R. § 240.15l-1(2)(i), requires a broker to provide, before or at the time of making a recommendation, a written disclosure of the material facts about the scope and terms of its relationship with the customer. This includes (1) whether the person is acting in a broker-dealer capacity; (2) the material fees and costs the customer will incur; (3) the type and scope of the services to be provided, including any material limitations on the recommendations that could be made to the retail customer; and (4) material facts relating to conflicts of interest that might incline a broker-dealer to make a recommendation that is not disinterested, including compensation arrangements. In the SEC’s Frequently Asked Questions, updated August 4, 2020, it indicated that if associated persons are either dually registered or, if they are not, they offer brokerage services through a dually registered firm, the Form CRS disclosure will not be sufficient to disclose the capacity that one is acting.

Thus, a broker must provide accurate disclosure of the capacity in which they are acting, which would also apply to any related oral disclosures and representations such as that in the TIAA case (i.e. advice being “objective,” “non-commissioned,” “fiduciary advice,” or acting in the “best interest” of the client). Firms should train their representatives to communicate accurately when describing whether the services and related advice is in relation to financial planning, opening a certain account type, or recommending to transact in a specific security or investment strategy, such as a rollover. Brokers should provide a written disclosure of the fees and expenses of an IRA, as well as what conflicts exist, such as the compensation individual representatives may receive when customers transfer assets from a retirement plan to a new IRA and how those conflicts incentivize certain recommendations. Finally, firms should review representative communications to ensure they are consistent with the written disclosures.

Regulation BI’s Care Obligation

What Happened in TIAA: According to the SEC, the Firm “did not treat or review rollover recommendations under a fiduciary standard,” and its “rollover recommendations regularly lacked any documentation confirming discussions of specific fees and expenses relating to Portfolio Advisor, or how they compared to expenses in the employer sponsored plan.”

The Order further states that although the Firm trained its advisors not to represent themselves as fiduciaries, they “remained confused as to their role and many continued to represent to clients that they were acting as fiduciaries.” Inconsistent with that representation was that the advisors had been trained “to use the rollover process to discover areas of vulnerability for these clients, called ‘pain points,’ to ‘create pain’ by helping clients ‘self-realize’ the financial vulnerability, and then to recommend Portfolio Advisor as the solution to their problem.”

Takeaway: The Care Obligation, 17 C.F.R. § 240.15l-1(2)(ii), requires a broker to have a reasonable basis to believe that a rollover is in the best interest of the retail customer at the time of the recommendation. As set forth in FINRA Notice 13-45, the considerations include: (1) the retail customer’s investment profile[1]; (2) potential risks, rewards, and costs of the IRA rollover compared to the investor’s existing 401(k) account or other circumstances; (3) fees and expenses; (4) level of service available; (5) available investment options; (6) ability to take penalty-free withdrawals; (7) application of required minimum distributions; (8) protection from creditors and legal judgments; (9) holdings of employer stock; and (10) any special features of the existing account. With respect to documentation, the Adopting Release states “we encourage broker-dealers to record the basis for their recommendations, especially for more complex, risky or expensive products and significant investment decisions, such as rollovers and choice of accounts, as a potential way a broker-dealer could demonstrate compliance with the Care Obligation.”

The Order reflects that the SEC expects disclosure of the compensation a representative expects to receive in connection with the rollover recommendation, and presentment of the alternatives to the recommendation along with a discussion of the various fees and costs associated with the options. Although the Order indicates it was not followed, TIAA had a policy to discuss four options: (1) maintaining the assets in the employer-sponsored plan; (2) rolling over the assets to either a self-direct or managed IRA; (3) rolling over the assets to a new employer’s plan; or (4) cashing out the plan assets in a lump sum distribution. Finally, although not required by Regulation BI, best practice would be to record why a rollover was recommended. This includes the factors in FINRA Notice 13-45, and there may be others.

A customer should also speak to their tax advisor, but if life circumstances require an early withdrawal, an IRA may be in the customer’s best interest as not all retirement plans allow for hardship distributions before a participant reaches the age of 59½. Further, while federal and state income tax would apply, the 10% penalty, for a customer not yet 59½, would not apply if the IRA withdrawal is utilized to fund: (1) qualified higher education expenses pursuant to 26 U.S.C. § 72

If a customer truly seeks the broadest range of investment options – equities, bonds, mutual funds or other products – then an IRA may meet that goal. This may not be determinative, however, as the SEC’s Adopting Release provides, “With respect to available investment options, we caution broker-dealers not to rely on, for example, an IRA having ‘more investment options’ as the basis for recommending a rollover. Rather, as with other factors, broker-dealers should consider available investment options in an IRA, among other relevant factors, in light of the retail customer’s current situation and needs in order to develop a reasonable basis to believe that the rollover is in the retail customer’s best interest.”

Finally, other factors to consider and record in favor of a rollover to an IRA could be the ability to make “qualified charitable distributions” to a 501(c)(3) charity pursuant to 26 U.S.C. § 408(d)(8), or to a “qualified HSA funding distribution” pursuant to 26 U.S.C. § 408(d)(9), which do not count toward taxable income.

Ultimately, brokers are required to consider the potential risks, rewards, and costs associated with the various options, weigh those factors in light of the particular retail customer’s investment profile, and consider the FINRA Notice 13-45 considerations to determine what recommendation is in the best interest of the retail customer.

Regulation BI’s Conflict of Interest Obligation

What Happened in TIAA: The Firm provided “positive incentives and negative pressures” for its advisors to recommend rollovers to its managed Portfolio Advisor. As an incentive, the Firm’s advisors were compensated via a discretionary annual variable bonus based on: (1) a “cumulative growth award” based on selling at least $100 million in certain products such as managed accounts; (2) an “annual growth award” that rewarded external asset sales over internal sales; and (3) a 10% allocation considered the “relationship complexity” including what proportion of assets were invested in managed accounts. Consequences for advisors not meeting “aggressive and ever-increasing growth goals” included being placed on a performance improvement plan or facing termination if their performance did not improve. This resulted in revenues from rollovers to the Portfolio Advisor accounts to increase from $2.6 million to $54 million from January 2013 to March 2018.

While the Firm provided a conflicts disclosure, it stated that the “compensation differential” was based on the “degree of effort” required to sell managed products and their “complexity.” However, the Firm did not have a basis for that justification until after 2017. Even then, the Firm provided the same compensation conflict disclosure for a range of products, described as complex and core, implying that advisors were similarly compensated for both categories, but that was not true as advisors received increased compensation for rollovers into the managed account. Finally, a disclosure stated that advisors acted as fiduciaries, which may have been true with respect to the client’s financial planning, but not true when the advisor was recommending the rollover.

Takeaway: The Conflict of Interest Obligation, 17 C.F.R. § 240.15l-1(2)(iii), requires a broker-dealer to “establish, maintain, and enforce reasonably designed policies and procedures to identify and, at a minimum, disclose, in accordance with the Disclosure Obligation, or eliminate all conflicts of interest” associated with recommendations. Firms must also eliminate sales contests, sales quotas, bonuses and non-cash compensation that are based on the sales of specific securities and specific types of securities within a limited period of time. It is also worth noting that FINRA Notice 13-45 provides, “Firms and their registered representatives that recommend an investor roll over plan assets to an IRA may earn commissions or other fees as a result. In contrast, a recommendation that an investor leave his plan assets with his old employer or roll the assets to a plan sponsored by a new employer likely results in little or no compensation for a firm or a registered representative.”

The SEC’s Adopting Release provides a list of potential methods to mitigate the effect of conflicts: (1) avoiding compensation thresholds that disproportionately increase compensation through incremental increases in sales; (2) minimizing compensation incentives for employees to favor one type of account over another; or to favor one type of product over another, proprietary or preferred provider products, or comparable products sold on a principal basis, for example, by establishing differential compensation based on neutral factors; (3) eliminating compensation incentives within comparable product lines by, for example, capping the credit that an associated person may receive across mutual funds or other comparable products across providers; (4) implementing supervisory procedures to monitor recommendations that are: near compensation thresholds; near thresholds for firm recognition; involve higher compensating products, proprietary products or transactions in a principal capacity; or, involve the roll over or transfer of assets from one type of account to another (such as recommendations to roll over or transfer assets in an ERISA account to an IRA) or from one product class to another; (5) adjusting compensation for associated persons who fail to adequately manage conflicts of interest; and (6) limiting the types of retail customer to whom a product, transaction or strategy may be recommended.

Other guidance from the SEC on conflicts disclosure may also be considered here. For example, in October 2019, the SEC provided guidance on disclosing conflicts arising from investment advisor compensation. Again while it is an RIA resource, the framework may assist broker-dealers in meeting the Conflict of Interest Obligation. For example, the guidance states “disclosing that it ‘may’ have a conflict is not adequate disclosure when the conflict actually exists” so firms should exercise caution when using “may” in conflict disclosures. Instead, the SEC expects a disclosure to reflect (1) the existence and effect of different incentives and resulting conflicts; (2) the nature of the conflict; and (3) how a firm addresses the conflict. This will provide the customer with information on what the conflict is, who it will affect, and when and under what circumstances will a recommendation be impacted.

Regulation BI’s Compliance Obligation

What Happened in TIAA: The Firm’s written policies appeared to be intended to meet several regulatory expectations. They required advisors to discuss fees and expenses relating to rollover recommendations, discuss and document the four investment options available to clients considering a rollover, and discuss training to document the various FINRA Notice 13-45 considerations. The SEC determined, however, the Firm did not implement and enforce the policies. Supervisors directed advisors not to follow the policies, regional training materials were contrary to the policy to discuss fees and expenses, and the Firm’s centralized supervision group did not have procedures in place to ensure advisors were following the policies.

Takeaway: The Compliance Obligation, 17 C.F.R. § 240.15l-1(2)(iv), requires broker-dealers to establish, maintain and enforce written policies and procedures that are reasonably designed to achieve compliance with Regulation BI. Relating to rollovers, the SEC’s Adopting Release provides that a best practice would be for firms to “encourage their associated persons to discuss the basis for any particular recommendation with their retail customers, including the associated risks, particularly where the recommendation is significant to the retail customer,” such as a rollover.

As illustrated in the TIAA case, it is not enough to simply have policies that appear to track regulatory requirements. In FAQs for the new regulation, the SEC has stated that policies and procedures “should be reasonably designed to address and be proportionate to the scope, size and risks associated with the operations of the firm and types of business in which the firm engages.” The point here is to make sure the policies are consistent with the actual business and practices of the firm. Having policies that are not actually implemented may present both regulatory and litigation risks. In addition to adopting appropriate policies, broker dealers should ensure that other materials – desk procedures, supervisory procedures, compliance bulletins, and training manuals – are consistent with the policies across the firm. These materials may be reviewed by examiners and produced during regulatory investigations and private litigation, so they should each be updated to be consistent with the policies a firm decides to adopt.

Conclusion

Regulation BI has been in effect for over a year, so regulatory review of rollover recommendations – whether by routine exams, sweeps or cause investigations – will increase. It is expected that regulators will pay special attention to these types of recommendations because, as described in the Adopting Release, they typically involve a customer that is at a “critical juncture in an investor’s life” and can “have substantial potential long-term impacts.” Accordingly, broker-dealers should take steps to continually review and improve the processes by which rollover recommendations are made, how conflicts are identified and disclosed or mitigated, and have policies that are enforced through the firm.

The relevant SEC Order, dated July 13, 2021, may be accessed here: https://www.sec.gov/litigation/admin/2021/33-10954.pdf

The SEC’s Regulation Best Interest Adopting Release No. 34-86031, dated June 5, 2019, may be accessed here: https://www.sec.gov/rules/final/2019/34-86031.pdf

The SEC’s FAQs on Conflict Disclosures for RIA Compensation, dated October 18, 2019, may be accessed here: https://www.sec.gov/investment/faq-disclosure-conflicts-investment-adviser-compensation#_ftnref9

 

Comments are closed.


Sitemap