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Extend Reg BI Protections to Small Plan Fiduciaries: ARA

The American Retirement Association is recommending that the Securities and Exchange Commission (SEC) further clarify Regulation Best Interest to avoid any “gap” in regulatory coverage.

In a follow-up to its Aug. 3 comment letter, the ARA, parent organization of the National Association of Plan Advisors (NAPA), suggests in a Dec. 12 comment letter that the Commission clarify the proposal to avoid any “gap” in regulatory coverage, stating that broker-dealers should be held to the same standards of conduct when providing investment advice to a small retirement plan fiduciary as when providing advice directly to an individual plan participant or IRA holder because such fiduciaries are “retail customers” within the meaning of Regulation Best Interest.

The SEC on April 18 released its proposed Regulation Best Interest; Commission Interpretation Regarding Standard of Conduct for Investment Advisers; and Form CRS Relationship Summary.

Retirement Plan Context

The ARA notes that broker-dealers routinely advise fiduciaries of small retirement plans concerning the investments that will be made available to participants under such plans, but like individual investors, most small plan business owners acting as retirement plan fiduciaries are not sophisticated investors. Moreover, the letter emphasizes that the quality of a plan’s investments can have a profound impact on a participant’s accumulation of retirement savings over the course of their careers.

For example, the letter cites data showing that a 50-basis point difference in investment returns, net of fees, over the course of 35 years can mean a difference of more than $100,000 in accumulated retirement savings. “Thus, requiring recommendations to small plan fiduciaries to adhere to the Regulation Best Interest’s standard of care would redound to the benefit of tens of millions of plan participants,” the letter states.

Closing the Gap

 The letter further explains that a textual reading of proposed Regulation Best Interest suggests that retirement plan fiduciaries may already qualify as a “retail customer” because they act as the “legal representative” of plan participants by exercising control over participants’ beneficial interest in the retirement plan.

Therefore, to avoid any “gap” in regulatory coverage, the ARA further recommends that the SEC clarify that non-professional small retirement plan fiduciaries are the “legal representatives” of retirement plan participants, as contemplated under the proposal.

Where to Draw the Line?

As for where to draw the line on defining “small” plan fiduciaries, the ARA suggests that the SEC consider the terms “institutional account” and “institutional investor” under FINRA Rules 2111 and 2210.

The letter notes that FINRA’s suitability rule defines “institutional account” by reference to FINRA’s “books and records” rule 4512(c), which sets the threshold at $50 million. Citing Form 5500 data, the letter further explains that, with an asset threshold of $50 million or less, 98.5% of DC plans reporting assets would potentially receive the protections of regulation if they do not have a professional fiduciary. What’s more, it notes, the Department of Labor’s now-vacated fiduciary standard of care for broker dealers similarly looked to $50 million of plan assets as the threshold.

As an alternative, the letter suggests the SEC could choose to apply a lower threshold at, for example, $10 million or less, where 92.5% of plans could potentially receive the protections of the regulation if they do not have a professional fiduciary.

Communications and Recommendations

As for institutional communications, the ARA suggests that the Commission may want to consider the employee-based definition of FINRA Rule 2210.

In the context of designating a small retirement plan as a retail customer, the letter further urges the Commission to consider guidance in determining the scope of the term “recommendations” under FINRA and ERISA, as well as determining how the concept of a “retail customer profile” may apply in the plan fiduciary context.

The ARA notes that the Department of Labor, much like the Commission, has looked to FINRA guidance in determining the scope of the term “recommendation,” but it’s not explicitly defined by the FINRA rules and is instead a case-by-case determination. The letter further explains that the DOL has found that actions like offering an investment selection menu to plan fiduciaries constitutes a “recommendation,” although it is unlikely to constitute investment advice under ERISA’s 5-part test — hence the gap.

“When brokers offer a single group annuity, managed account and/or target date fund series for consideration by a retirement plan fiduciary, they are clearly providing an investment recommendation but are not likely to fit within the definition of an investment fiduciary under ERISA,” the letter advises. Moreover, it notes that investment firms have devised sales strategies and protocols to skirt ERISA’s five-part fiduciary test while offering investment recommendations to sponsors of small retirement plans.

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