F E A T U R E
ROLLOVER RECOMMENDATIONS Under the SEC’s Best Interest Standard
Here’s what has changed, what hasn’t changed, and what advisors should be doing now. By Joshua J. Waldbeser & Fred Reish
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n June 5, the SEC finalized its “best interest” rulemaking package, including: » Regulation Best Interest: The BrokerDealer Standard of Conduct (“Reg BI”), governing recommendations to retail customers by broker-dealers; » Interpretation Regarding Standard of Conduct for Investment Advisers (“RIA Interpretation”); and » Form CRS Relationship Summary; Amendments to Form ADV (“Form CRS”).
WHAT HASN’T CHANGED?
Note:
This is our third article in NAPA Net the Magazine on the issue of plan-toIRA rollovers. Readers may wish to review our previous contribution from the Summer 2018 issue, “Recommending Rollovers: What Advisors (Still) Should Know and Do,” and particularly our contribution to the Spring 2019 issue, “Recommending Rollovers: What the SEC Says Advisors Need To Do,” as important background. – J.W., F.R.
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Compliance with Reg BI and the Form CRS requirement is mandatory as of June 30, 2020. The RIA Interpretation, on the other hand, simply reflects and clarifies the SEC’s view on the duties that RIAs owe their clients as fiduciaries under the Advisers Act – and thus is “effective” already. It is no surprise that rollovers are a point of emphasis in the final rules – this was also true of the proposed rulemaking. The final rules apply to rollovers from all “workplace retirement plans,” including both 401(k) and other ERISA-covered plans, and nonERISA plans such as governmental 403(b), 457(b) and pension plans.
N A P A
N E T
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T H E
To avoid repetition, we assume that readers have at least browsed our Spring 2019 article, which addressed rollovers in the context of the proposed SEC rulemaking, and we pick up from there. First, as anticipated, the final rules embrace certain existing aspects of SEC and FINRA guidance, as well as the vacated DOL fiduciary regulation. For rollovers from 401(k), 403(b) and other participant-directed plans, the rules indicate that advisors must make a reasonable determination that a plan-to-IRA rollover
would be in the best interest of the customer. (For ease of reading, we use “advisors” to include both investment advisers and brokerdealers. As that suggests, in our view, the requirements for rollover recommendations are the same under both Reg BI and the RIA Interpretation.) In that regard, advisors should take into account both: » certain factors summarized in our previous articles, which, according to Reg BI’s release for the final regulation, “should generally include, among other relevant factors: fees and expenses; level of service available; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; holdings of employer stock; and any special features of the existing account,” and » the customer’s profile, including at least his or her “age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, (and) risk tolerance.” This determination must be reasonably comprehensive and tailored to the
M A G A Z I N E
11/14/19 2:01 PM