In December, FINRA issued a notice (Regulatory Notice 13-45) reminding broker dealers of their responsibilities concerning rollovers, signaling their intent to focus more on this area. This week, FINRA issued an alert to investors cautioning them about issues surrounding rollovers, including “no fee” claims and conflicts of interest, as well as the options investors have and the tax consequences that accompany them.
A report from The Groom Law Group details the implications of Notice 13-45 and outlines concerns and actions that broker dealers and their registered reps need to consider.
While it’s old news that advisors’ investment recommendations must meet at least the suitability standard, Groom notes that this standard now applies to the rollover decision. The authors were surprised by the depth and breadth of the notice, citing the 2013 Government Accountability Office study which found that some IRA providers were giving misleading information about fees and the advisability of making a rollover. Groom also noted that the notice may be in alignment with the DOL’s redefinition of fiduciary effort (now referred to by DOL officials as the “conflict of interest rule”).
In the wake of the notice, Groom recommends that BDs and advisors working with IRA rollovers need to understand not only ERISA plans but the options and fees of the individual plan that their client is rolling out of — noting that the advisor should have a “substantial” understanding of that plan in order to determine if rolling out of it is suitable.
At the forefront of the discussion is the potential conflict of interest: If the rollover is deemed to not be suitable, then the advisor does not receive a commission, or at least a lower one if they are the plan’s advisor. Groom recommends that BDs reevaluate their marketing materials, conduct substantial training or instruct their reps not to make any recommendations when it comes to the decision of whether to roll over funds or not.
The Groom report notes:
While in the eyes of FINRA the Notice may not contain any “new” guidance, we believe that many BDs will be surprised how the FINRA guidance will impact their current business models. Further, BDs will need to determine whether and how to meet the requirements outlined in the Notice. Finally, given the DOL’s interest in further regulating the rollover marketplace, BDs should be aware that they may be facing further regulatory scrutiny in the not too distant future.
