Well, having previously outlined the similarities between those two, in his most recent blog post noted ERISA attorney Fred Reish now turns to how a best interest recommendation of a distribution and rollover should be made.
He starts by reminding us that in its discussion of recommendations about distributions and rollovers in the proposed Reg BI, the SEC says that, where the recommendation involves a securities transaction, the best interest standard of care will apply to broker-dealers, and then goes on to describe the best interest standard of care as requiring care, skill, prudence and diligence and making a recommendation that is in the best interest of, and loyal to, the participant.
Now, as to whether a recommendation to take a distribution and roll it over is a securities transaction, Reish notes that the SEC refers to FINRA Regulatory Notice 13-45, and that the SEC guidance and that Regulatory Notice, in combination, point out that, “in the typical recommendation to a 401(k) participant, there are two securities transactions.” The first is the liquidation of the investments in a participant’s account (since one must normally sell off the investment to make a distribution), and the second transaction is in the rollover IRA, where a new investment recommendation will be made. As a result, Reish explains, the distribution and rollover recommendations to 401(k) and 403(b) participants will ordinarily involve two securities transactions and both will be subject to the proposed best interest standard of care.
He cautions that while the SEC does not discuss the process and analysis required to make a best interest recommendation of a distribution, it does make a number of references to Regulatory Notice 13-45, and that notice goes into some detail that the information needed to evaluate whether a rollover recommendation would be suitable. Reish writes that it therefore seems “safe to assume that, at the least, the same information would be required for a best interest recommendation.”
In that Regulatory Notice, Reish notes that FINRA points to a number of factors to be considered, including the investments, services, and fees and expenses in the plan, and that a broker-dealer will need to gather information in order to evaluate those factors… and then compare them to the services, expenses, and investments in the proposed rollover IRA – in light of the financial needs, circumstances and preferences of the participant.
“While it is easy to say that plan information is needed, it is hard to find that information,” Reish acknowledges, pointing out that those are the same factors that the Labor Department said were primary considerations for making a best interest recommendation under BICE.
Reish concludes by noting that the Labor Department, SEC and FINRA have converged to agree on the important factors that need to be considered to make a rollover recommendation – though it’s proven to be difficult to gather information about plan investments, expenses and services.
Fortunately, he writes, the Labor Department did offer guidance for situations where it was not possible to find the information, and Reish assumes that the SEC and FINRA will share the alternative approach provided by the DOL, which was described in a set of FAQs. “Broadly stated,” he notes, “the DOL permits use of ‘alternative data’ where a participant cannot find, or does not want to use, the primary plan data.”