An Employee Benefits Law Alert discusses how an Employee Retirement Income Security Act (ERISA) retirement plan would not satisfy the definition of “retail customer” in the Securities and Exchange Commission’s (SEC)’s Regulation: Best Interest section of its new proposed conflict of interest standard; however, non-ERISA 403(b) plans may satisfy the definition.
The Regulation: Best Interest section of the proposal will “raise the standard for broker/dealers to make it clear that they have to keep customer interests first when serving retail clients.” And lastly, SEC staff explained, the proposal will recast the fiduciary standard under the Advisers Act, “in order to reaffirm and clarify the SEC’s views on the standards of conduct applicable to investment advisers, who are fiduciaries.”
According to The Wagner Law Group, the Regulation Best Interest is applicable to certain transactions between broker-dealers and a retail customer, defined as “a person, or the legal representative of such person, who: (1) receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer or a natural person who is associated with a broker-dealer; and (2) uses the recommendation primarily for personal, family, or household purposes.” Thus, while the definition applies to persons, not simply natural persons, an ERISA plan could qualify as a person, but it could not satisfy the second prong of the definition, and therefore would not be a retail customer.
The Alert further explained that under Department of Labor (DOL) regulations, a tax-sheltered annuity program that is funded solely through salary reduction contributions or an agreement to forego a salary increase, is not considered to be established or maintained by an employer and, therefore, is not considered a pension plan under Title I of ERISA if: (i) employee contributions are completely voluntary; (ii) all rights under the contract or annuity are enforceable by the employee; (iii) the employer’s involvement is limited; and (iv) the employer receives no compensation, direct or indirect, in cash or otherwise, other than reasonable reimbursement to cover expenses involved in performing the employer’s obligations under the salary reduction agreement.
If these conditions are satisfied, then the employee owning the annuity contract would likely be treated as a “retail customer” and subject to the protections of the Best Interest rules. “To that end, although they are treated differently for tax purposes, the participant in the non-ERISA 403(b) plan would seem to be in the analogous position to the owner of an IRA,” the Alert says.However, the Wagner Law Group notes that fixed annuities and fixed indexed annuities are insurance products, not securities, so the SEC cannot regulate them. Variable annuities are securities and are regulated by the SEC. “Since some 403(b) arrangements are funded with fixed and fixed annuity insurance products, state insurance departments might consider adopting the SEC Best Interest standard,” it says.