The Securities and Exchange Commission (SEC) may have labeled its interpretation of the standard of care for RIAs as a “proposal” – but was it more than that?
According to a recent blog post on the subject, noted ERISA counsel Fred Reish observes that in its proposal the SEC explained that the RIA Interpretation was based on the SEC’s current understanding of the duties of investment advisers – and that, as a result, Reish thinks that investment advisers should treat the “RIA Interpretation” as governing guidance and should make sure that they are complying with the duties explained in the RIA Interpretation.
Reish goes on to explain that the RIA Interpretation says that all advice to all clients is fiduciary advice, and therefore subject to the RIA duty of care and duty of loyalty. Now, when the 5th Circuit Court of Appeals vacated the DOL fiduciary rule, the old fiduciary regulation was revived, bringing back the five-part test for fiduciary status.
Five-Part Test
Reish notes that, under the DOL’s five-part test, an advisor who recommends a distribution and rollover would not ordinarily be a fiduciary. However, where the advisor is a fiduciary to a plan, and makes a recommendation to a participant in that plan to take a distribution and roll over to an IRA with the advisor, the DOL will consider the advisor (either a broker-dealer or RIA) to be a fiduciary for that purpose – and that applies to all types of ERISA-governed plans, including 401(k)s, 403(b)s, cash balance plans, profit sharing plans and pension plans.
With regard to RIAs, Reish notes that the SEC said in its RIA Interpretation that recommendations of plan distributions and rollovers would be fiduciary advice, subject to the best interest standard of care. “Since the SEC RIA Interpretation applies to all recommendations to all clients, an investment adviser would be held to the best interest standard of care for distribution and rollover recommendations to all plans (even if not ERISA covered), including 401(k)s, 403(b)s, cash balance plans, pension plans and profit sharing plans,” he writes.
Reish goes on to note that, under the SEC’s proposed Reg BI, a broker-dealer’s rollover recommendation to a participant in a participant-directed plan would also be subject to the best interest standard of care, since the recommendation to take a distribution necessarily includes a (securities) recommendation to liquidate the investments inside the participant’s account.
Securities ‘Act’
“However,” Reish cautions, a recommendation to take a distribution from a cash balance or pension plan would not involve a securities recommendation and, therefore – at least in his assessment – would not be subject to the best interest standard. Ditto a recommendation to take a distribution from a “pooled” DC plan, such as a profit sharing plan, at least those that do not involve a securities recommendation – since the participant does not have any authority to determine which investments are sold to finance the distribution.
In both cases – RIAs and broker-dealers – Reish observes that the recommendation about how to invest the money in the rollover IRA would be covered by the SEC’s Reg BI standard.
This leaves two remaining questions, Reish notes: What is the best interest standard, and what does the best interest standard require for distribution recommendations? But those are subjects of future posts.
