Archive for April, 2015

FSI has an identity crisis on its hands, @HDelux tells @RIABiz

Thursday, April 16th, 2015

“For the first time, FSI’s citizenship cannot be defined by their constituent’s registration status. What defines a firm’s position on this issue is their business opportunity and readiness to accept a fiduciary obligation. FSI hasn’t realized what many of its members have — that there’s no stopping this train. So that leaves each of its members to stake out their own position on this issue.”

 

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Can a bull change its spots? @HDelux talks with @RIABiz

Thursday, April 16th, 2015

Hamburger: “Yesterday I caught a headline that ‘Merrill seeks to be leader on fiduciary’ and I thought I needed to get my eyes checked. But then I remembered that in the securities industry even a bull can change its spots. In short, those that already have systems to support the fiduciary standard will be quick to jump on the train while those that don’t will be left yelling and screaming at the station.”

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“DoL’s new proposal gets to the root of the service provided” @HDelux to @onwallstreet

Thursday, April 16th, 2015

“If the service is investment advice, then it must be done by a fiduciary,” he says.  “If you are merely selling and not furnishing such advice, you can still avoid being held to a fiduciary duty.”  The impact of the new proposal on a firm will depend on how they’ve been acting, Hamburger adds.

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Here’s our take on the “best interest contract exemption” contained in the DOL fiduciary proposal…

Wednesday, April 15th, 2015

A new type of prohibited transaction exemption called the “best interest contract exemption” was created that allows firms to continue to set their own compensation practices (including charging commissions).  In order to use this exemption, however, the company and individual adviser providing investment advice must enter into a contract with its clients that:

  1. Commits the firm and adviser to providing advice in the client’s best interest;
  2. Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest; and
  3. Clearly and prominently discloses any conflicts of interest, like hidden fees, that might prevent the advisor from providing advice in the client’s best interest.

The DOL does not have the authority to determine what type of registration a securities professional should have (that’s between Congress and the SEC).  If, however, you look at the definition of fiduciary, most, if not all, DOL fiduciaries would be registered investment advisers (assuming their advice was regarding securities).  And here’s where it hurts: if the DOL fiduciary was a registered investment adviser, it would already be committed to the three requirements of the “best interest contract exemption.”

There will undoubtedly be no shortage of opinions about the proposal from all sides.  If you cut through it all, however, you get to the root: if you provide investment advice for compensation, you are a fiduciary.  Wait, that’s nothing new.  So what’s this really all about?  It goes back to the SEC’s unwillingness to enforce broker-dealer’s limited exception to the Investment Advisers Act.  That’s right.  The SEC simply needs to enforce the Investment Advisers Act and require adviser registration of brokers that provide advice beyond that which is solely incidental to their brokerage practice.  If the SEC were only to enforce the law as it stands, all of these firms posing as financial advisors would, indeed, be registered investment advisers and thus, subject to the fiduciary standard anyway.  This DOL proposal wouldn’t be necessary… at all.

Make no mistake: there is a place for fiduciary advisors and non-fiduciary sales people.  And it’s a shame that the DOL has to create this tangled web while it would be much easier for the SEC to enforce the law.  Much of the confusion that pervades the financial services industry would be cured.  And, yes, it’s that easy.

Department of Labor Proposes Fiduciary Rule

Tuesday, April 14th, 2015

It had to be obvious that when President Obama gave his support to a DOL fiduciary rule, that a proposal was imminent.  Today, the DOL came out with its much anticipated (over a period of years) proposed revisions to the definition of fiduciary.  The following is a brief summary of the main issues that impact investment advisers, but more likely broker-dealers or dual registrants.

Under the proposed definition of fiduciary, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, participant, or IRA owner for consideration in making a retirement investment is a fiduciary.  Notice there is no exemption if the compensation is “solely incidental” to other services.

Being a fiduciary means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected. This is a stronger fiduciary duty than that required under the Investment Advisers Act, which allows for accepting payments that are conflicts as long as the conflicts are disclosed and the recommendations are in the client’s best interest.

Advisors (which includes investment advisers, broker-dealers, insurance agents, etc.) and plan sponsors are exempt from being deemed a fiduciary when providing general education.  This is similar to the current rule, except it makes it clear that references to specific investments constitutes investment advice.

A new type of prohibited transaction exemption was created (the “best interest contract exemption”) that allows firms to continue to set their own compensation practices (including commissions).  In order to use this exemption, the company and individual adviser providing investment advice must enter into a contract with its clients that:

  • Commits the firm and adviser to providing advice in the client’s best interest;
  • Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest; and
  • Clearly and prominently discloses any conflicts of interest, like hidden fees, that might prevent the advisor from providing advice in the client’s best interest.

The DOL does not have the authority to determine what type of registration a securities professional should have.  If, however, you look at the definition of fiduciary, it would seem that most, if not all, DOL fiduciaries would be registered investment advisers if the advice was regarding securities.  If the DOL fiduciary was a registered investment adviser, it would already be committed to the three requirements of the “best interest contract exemption.”

There will undoubtedly be noise about the proposal from all sides.  If you cut through a lot of the legalese, however, you can see that there is a simple theme; if you provide investment advice for compensation, you are a fiduciary.

There will also be talk about what the SEC should now do about harmonizing investment adviser and broker-dealer standards of care.  We suggest they follow the same theme as the DOL, but use that they already have in place.  There is a place for fiduciaries and non-fiduciary sales people.  The SEC should simply enforce the Investment Advisers Act, and require adviser registration of brokers that provide advice beyond that which is solely incidental to their brokerage practice.  Much of the confusion that pervades the financial services industry would be cured.

Department of Labor Proposes Fiduciary Rule

Tuesday, April 14th, 2015

It had to be obvious that when President Obama gave his support to a DOL fiduciary rule, that a proposal was imminent.  Today, the DOL came out with its much anticipated (over a period of years) proposed revisions to the definition of fiduciary.  The following is a brief summary of the main issues that impact investment advisers, but more likely broker-dealers or dual registrants.

Under the proposed definition of fiduciary, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, participant, or IRA owner for consideration in making a retirement investment is a fiduciary.  Notice there is no exemption if the compensation is “solely incidental” to other services.

Being a fiduciary means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected. This is a stronger fiduciary duty than that required under the Investment Advisers Act, which allows for accepting payments that are conflicts as long as the conflicts are disclosed and the recommendations are in the client’s best interest.

Advisors (which includes investment advisers, broker-dealers, insurance agents, etc.) and plan sponsors are exempt from being deemed a fiduciary when providing general education.  This is similar to the current rule, except it makes it clear that references to specific investments constitutes investment advice.

A new type of prohibited transaction exemption was created (the “best interest contract exemption”) that allows firms to continue to set their own compensation practices (including commissions).  In order to use this exemption, the company and individual adviser providing investment advice must enter into a contract with its clients that:

  • Commits the firm and adviser to providing advice in the client’s best interest;
  • Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest; and
  • Clearly and prominently discloses any conflicts of interest, like hidden fees, that might prevent the advisor from providing advice in the client’s best interest.

The DOL does not have the authority to determine what type of registration a securities professional should have.  If, however, you look at the definition of fiduciary, it would seem that most, if not all, DOL fiduciaries would be registered investment advisers if the advice was regarding securities.  If the DOL fiduciary was a registered investment adviser, it would already be committed to the three requirements of the “best interest contract exemption.”

There will undoubtedly be noise about the proposal from all sides.  If you cut through a lot of the legalese, however, you can see that there is a simple theme; if you provide investment advice for compensation, you are a fiduciary.

There will also be talk about what the SEC should now do about harmonizing investment adviser and broker-dealer standards of care.  We suggest they follow the same theme as the DOL, but use that they already have in place.  There is a place for fiduciaries and non-fiduciary sales people.  The SEC should simply enforce the Investment Advisers Act, and require adviser registration of brokers that provide advice beyond that which is solely incidental to their brokerage practice.  Much of the confusion that pervades the financial services industry would be cured.

Firm Settles with SEC Over Claim That Employment Agreement Violated Whistleblower Laws

Thursday, April 2nd, 2015

KBR Inc. agreed to settle charges by the SEC that it required witnesses in internal investigations to sign confidentiality statements keeping them from reporting possible securities-law violations to outside authorities.  KBR agreed to pay $130,000.  SEC Enforcement Director Andrew Ceresney said that the SEC has a number of ongoing investigations involving companies trying to silence whistleblowers.

The SEC has stated that it wants language in any such employment agreement to make it clear that employees can report violations to the SEC.  In light of this case and the SEC’s priorities, companies may want to revisit employment agreements that limit what employees can do or say.