InvestorCOM recently chatted with David Porteous from Faegre Drinker, Mitchel C. Pahl from Katten, Craig Watanabe from DFPG Investments, and Ed Wegener from Oyster Consulting LLC to discuss the PTE 2020-02 retrospective review process, how to meet the retrospective review requirements, and how the DOL’s requirements correlate with the SEC’s expectations. 

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Parham Nasseri [PN]: Rollovers have been under scrutiny for some time starting from state regulators all the way to FINRA and the SEC, and now the Department of Labor (DOL), David, what’s the general driver in your view around why these rollovers are under intense scrutiny? 

David Porteous [DP]:  I think the fundamental issue is the economics of the decision being met. Regulators across the spectrum are looking at this as a seminal investment decision to be made if you are indeed rolling out of a plan. For a broker-dealer and investment advisor looking to capture qualified money coming from a plan or from another IRA and saying, “This is an important decision that people need to understand the fees and costs associated with it,” that’s what I mean in terms of the focus on the economics of it, and therefore this is as important as an investment decision that is going to be made as it would be if you have a transaction, a specific security or something like that that might be being recommended down the road.  

By moving the trigger for a best interest or fiduciary analysis, what are the circumstances in which you’re making a recommendation? Are you making a recommendation when you tell people what their options are? Specifically tailored to them in terms of, “Hey, whether it’s a good idea to move out of a plan and into an IRA or the like?” Then you know that’s an important decision that needs to be taken as equally seriously by the firms and embracing that they have an obligation to do this with the best interest of the investor in mind. That’s the driver of the analysis across the spectrum. This has serious economic consequences, particularly rolling out a plan it can’t be undone. 

PN: Ed, as someone who’s led many functions at FINRA, you have likely seen this before, policies and new requirements being put into place for firms and many firms rushing to comply. With the February PTE 2020-02 retrospective review requirements ahead of us, what do you think regulators will be looking to do post-deadline? 

Ed Wegener [EW]: In my experience, typically when regulators create new and significant rules, they generally tend to understand that there’s going to be a learning period and their expectations take that into consideration. As a result, they tend not to be super aggressive early on provided that they see good faith efforts to comply.

It’s very similar to the approach that the SEC and FINRA took when they initially started to review for Regulation Best Interest (Reg BI). In that case, they announced that they were going to start out looking for good-faith compliance and were focused primarily on ensuring that firms had adequate policies and procedures in place, that firms were making a good-faith effort to comply. Where the regulators saw issues or foot faults they let the firms know and with the expectation that they would take corrective action and improve their programs. Then they gradually shifted to focusing more on disclosures and whether they were adequate, and whether they were done in a timely manner. In 2022 they began looking more substantively and conducting some specific reviews around the Care Obligation, so the reviews got more in-depth, and they really started to get under the hood in terms of what they were looking at and what their expectations were. And now you’re starting to see some of the initial enforcement actions come out of it. Generally, I would anticipate that the DOL would take a similar approach with respect to the PTE.  

In that regard, I suggest that firms make sure that they have a well thought out set of policies and procedures, that they have a good process in place for assessing rollover recommendations, and that they’re documenting that assessment, making sure that they have a process in place for making the appropriate disclosures and that they have a process for making sure that those disclosures are made on a timely basis, and that they’re starting to get ready to start conducting retrospective reviews. Now that all being said, this is a little bit different than Reg BI in that the PTE is really an exception to a prohibition, so failing to comply technically could cause a firm to not be able to take advantage of the exception. Where violations do occur, and as you’re reviewing, it’s important that firms employ the self-correction requirements that the DOL put out.  

I think early on you’re going to see an expectation of good-faith efforts. But that doesn’t mean that you should take too much comfort in that because eventually the examinations and the expectations are going to get higher. In the second or third year, you’re probably going to be seeing more in-depth reviews and higher expectations in terms of compliance with the requirements. 

PN: Mitch, we’ve heard questions from our clients regarding the degree of ambiguity around the Department of Labor’s investigative powers. Can you talk a little bit about this to our webinar participants today? What can the Department of Labor do from an investigation perspective, do they have enforcement capabilities?  

Mitchel C. Pahl [MCP]: As a technical matter, the DOL has the authority to investigate where they think there has been a violation of law. If you study the guidance and look backward in time, even to the guidance that was ultimately overturned by the 5th Circuit in 2018, it is clear that the Department of Labor believes that there are certain types of practices, particularly the manner in which investment advisors compensate themselves and the advice that they give that a create a status of fiduciary for the investment advisor and, but for satisfying the exemption, there is going to be what’s called a prohibited transaction and hence a violation of law.  

What typically happens in practice if there is an investigation? One can expect to see anything from a letter from the Department of Labor asking some questions – we’ve had some clients in the past year get DOL letters, it’s not a formal investigation – all the way up to a subpoena. A subpoena in my experience typically is direct, broad, and asks for quite a bit of in-depth information. You might expect to see with the subpoena power if it’s exercised, asking for policies and procedures, any written materials regarding training, retroactive reports or reviews, et cetera. It’s a very broad power.

I think to a certain extent the way it’s wielded is going to depend upon the evolution of how this rule plays out, but also depends upon the circumstances. For example, if the DOL finds good faith, if there is if we’re talking about foot faults, one might expect not to see a subpoena, whereas if there is just not a good faith attempt to comply with the rules, or if it seems that investment advice or at least advice given to a client falls within the concept of what the DOL thinks as investment advice and there has been little or no effort in good faith to satisfy the requirements of the exemption, then you may very well see a subpoena. Once you see a subpoena, it’s not a choice as to whether you’re going to answer it or not, it really is something that is the subject of demand, essentially. 

PN: Craig, you’ve got a slightly different perspective into these requirements from a firm’s perspective. How do you balance requirements between the SEC’s Reg BI and the DOL’s PTE 2020-02?  

Craig Watanabe [CW]: I think it brings up a real challenge for firms because normally the way that our regulatory regime is laid out is we have 16 different federal regulators and a number of different state regulators. Normally regulation is by industry type, so we have insurance regulators at the state level, FINRA regulates BDs, the SEC regulates investment companies and investment advisors, and we have the CFTC and so forth. Those are what I call parallel. There is one regulator that regulates by account type and that is perpendicular, it cuts across all the others, and that’s the Department of Labor. They regulate by account type, and so they cut across virtually all the other regulators. We do retirement accounts and have retirement investors. So, you asked a really good question, how do we manage that? 

Well, I think when managing overlapping regulations, as with the DOL, which inevitably overlaps just about all other regulations that we have by industry type, you have to do your best to try to consolidate and harmonize whenever possible. For the most part, the DOL has not made it easy to do either. They have their own way of doing things. If you read the adopting release, they intentionally did not harmonize with SEC rules. The one area where they did, was in the impartial conduct standards and the best interest standard, but most everything else you know we’re seeing challenges because the DOL is dictating in a prescriptive way that we need to do things that we’re not accustomed to doing that we’ve never done before. And so that, I think is the main challenge. 

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If you enjoyed this article, you can listen to the full discussion online – Watch the replay of the webinar, DOL’s Fiduciary and Retrospective Review Expectations.  

 

If you would like to learn how InvestorCOM RolloverAnalyzer and its compliance dashboard capability is helping firms meet the DOL’s rollover and retrospective review requirements, sign up to see a demo.