On Day Two of the PLANADVISER National Conference, panelists spoke about the Securities and Exchange Commission (SEC)’s Regulation Best Interest (Reg BI), the Department of Labor (DOL)’s newly proposed fiduciary rule and state-implemented fiduciary rules.

Speaking at the virtual event, David Kaleda, principal, Groom Law Group, Chartered, said Reg BI is broader than the previous DOL fiduciary rule, which was vacated in federal court. “Primarily, the DOL’s jurisdiction is employer-sponsored plans. Reg BI is for any securities recommendation in any type of accounts,” he said.

“All of us would probably agree that when we read the previous DOL fiduciary rule, we thought it was one ambitious piece,” Andrea McGrew, chief compliance officer/chief legal officer, USA Financial. “It was an overhaul of banking and insurance industries, which are not in the jurisdiction of the DOL. They threw a wide net.”

McGrew called the SEC’s Reg BI a “sneaky broad.” “Knowledge will come through exams, enforcements and no-action letters,” she explained. However, after the shock of the previous DOL rule, everyone found Reg BI workable, she added.

“The heart of all of this is just transparency—making sure clients understand what they’re paying and what they’re paying for,” McGrew said. She suggested that financial professionals provide options to clients, do an analysis of each option and keep documentation of the analyses. “You don’t want the SEC to ask for each client why you recommended this,” she said.

The Customer Relationship Summary (CRS) required by Reg BI, at a high level, shows how advisory and brokerage practices are different, Kaleda said. “The SEC’s theory was the people didn’t understand different ways accounts were managed and the different costs that come with that,” he explained.

Phil Troyer, chief compliance officer, Resources Investment Advisors, noted that Reg BI is mainly for broker/dealers (B/Ds), but as a registered investment adviser (RIA), his firm has to provide a CRS to wealth management clients. It doesn’t have to provide one to plan sponsor clients or participants if speaking to them by authorization of the plan sponsor. However, if an adviser handles a rollover by a plan participant, he or she does have to provide them with a CRS.

Reg BI went into effect June 30. Troyer’s firm is undergoing an SEC audit. He said Reg BI didn’t come up; the audit is more about share class issues. He explained that the SEC completed a share class initiative that allowed for a safe harbor from enforcement action if advisers self-reported 12b-1 fees. However, now the SEC is going to advisers that didn’t self-report just to check.

DOL Makes a New Fiduciary Rule Proposal

The newly proposed DOL fiduciary rule effectively reinstates the department’s 1975 regulation defining who is an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, commonly known as the “five-part test.”

Kaleda pointed out that in the preamble to the rule proposal, the DOL said it has changed how it interprets the five-part test. “So, this is another attempt by the DOL to state that, ‘Whatever you think advice may be, it may be more than that,’” he said. “Advisers and broker-dealers need to think about whether their day-to-day interactions are within the five-part test.”

Kaleda explained that the five-part test says a person is a fiduciary if he or she: (1) makes recommendations regarding the advisability of buying, selling, or retaining securities; (2) does so on a regular basis; (3) pursuant to a mutual agreement; (4) that “such services shall serve as the primary basis for investment decisions with respect to plan assets;” and (5) such advice is individualized to the plan taking into account factors such as investment policies, investment strategies, the plan’s overall portfolio, or diversification of plan investments. “So, historically, a traditional broker could point to a number of those—for example, only doing something on a one-off basis not on a regular basis—and say he’s not a fiduciary,” Kaleda said. “Frankly, I think people could pick it apart and make a relationship so that they didn’t fall under fiduciary status.”

He also noted that a DOL advisory opinion, known as the “Deseret Letter,” said financial planners or advisers were not acting as fiduciaries when they recommended participants roll retirement plan assets to an individual retirement account (IRA). However, the DOL withdrew that advisory opinion as of June 29.

In the newly proposed fiduciary rule, the DOL also pointed to parts of the five-part test, such as “regular basis” and “mutual understanding,” and explained it is not so easy to get out of fiduciary status, Kaleda said. “For example, if an adviser makes a recommendation that a participant roll over retirement plan assets to an IRA, and afterward, he is going to manage the IRA investments, the DOL seems to be saying that is considered ‘regular basis’ advice,” he said.

The DOL proposal has the same best interest standard as Reg BI and requires the disclosure of any conflicts of interests, Kaleda noted. “There’s a good chance that advisers are already doing this because of Reg BI,” he said. Financial professionals also must have policies and procedures in place for how they are going to make recommendations.

The DOL is also proposing a new prohibited transaction class exemption for investment advice fiduciaries. “Once you decide you are a fiduciary, recommending a move from a retirement plan to an IRA and getting a commission may be a conflict. That’s what the proposed exemption would resolve,” Kaleda explained.

In both Reg BI and the new fiduciary rule proposal, when it talks about compensation, it doesn’t just mean compensation for advisers but also compensation for affiliated parties, Troyer said. “If you recommend a rollover to a retirement plan participant and you don’t take 12b-1 fees but your firm’s related broker/dealer will, you have to disclose that,” he explained.

“For receiving compensation, the DOL also doesn’t make a distinction between a firm and a person,” Kaleda said.

There is a push now to harmonize the DOL’s ERISA fiduciary rule, the fiduciary rule under the Investment Advisors Act and Reg BI for broker/dealers, Troyer said.

“There are things you can’t do under ERISA that you can do under the Investment Advisors Act,” he said. “For example, compensation may be considered unlevel and a recommendation would be a prohibited transaction under ERISA. It might also be a prohibited transaction under the Investment Advisors Act, but under that law you can ‘disclose it away.’ You just have to disclose how you are being paid.”

States Are Getting Into the Fiduciary Rule Game

According to Kaleda, half a dozen to 10 states have passed new fiduciary rules regarding investment advice and another half dozen or so have bills in their legislature. “It’s a trend I think will continue,” he said. “Every state is handling it differently. Some liked the previous DOL fiduciary rule so they’re doing something similar. Some are making rules like Reg BI because they thought it was never going to come. It’s important to know the differences for financial firms that do business in various states.”

Kaleda noted that ERISA preempts many state laws, but generally insurance regulations aren’t preempted by federal statutes. “It can become complicated, or in some cases, it already has,” he said.

“We are pretty much in all 50 states now, so we hope preemption prevails,” Troyer said. “There’s so much to comply with that I think everyone would be best served with a single regulation.”

McGrew said people are reluctant to challenge states on their fiduciary rules. “There are so many other fires to focus on, people are just saying, ‘OK, we’ll do it,’” she said.

McGrew contended that sometimes too much harmonization can ignore the benefits of unique situations, but she said in the case of differing rules in each state, harmonization would be beneficial. “It gets to be very challenging for advisers and brokers. I’m hopeful some consistency will come out of this so we can have something to latch onto and feel good about going forward,” she said.

For state rules, McGrew recommended that advisers and brokers get their procedures in order for compliance officers to review. For Reg BI, the DOL rule and state rules, she said financial professionals should work with their compliance departments to know what they need to do and how to be transparent.

“We’re heading into an era where we should have been all along—transparency, disclosure and working together,” she said.