Art by Jun Kim
On June 22, the Securities and Exchange Commission (SEC)’s Office of Compliance Inspections and Examinations (OCIE) announced the multi-year Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative. OCIE intends to examine advisers and broker/dealers (B/Ds) for how they deliver products and services to retail investors who invest in retirement vehicles.
OCIE staff will use data analytics, information from prior examinations and examiner-driven due diligence to identify registrants to be reviewed. In its announcement, OCIE noted that it would focus on the activities of the investment adviser representatives and registered representatives as needed—not just on their firms.
The timing of this announcement is interesting, given the Department of Labor (DOL)’s recent proposal to substantially change its definition of “investment advice.” According to the department, one of the purposes of its proposal is to protect retail investors, including those who invest through individual retirement accounts (IRAs).
OCIE intends to focus on certain “higher-risk areas.” The office’s announcement, published in the June 22 issue of its National Exam Program Risk Alert, does not identify these areas. However, expect that the staff will focus on, among other things, advice and recommendations regarding rollovers from employer plans to IRAs, investments in municipal bonds, investments in complex or structured products and higher-yield securities, and compensation arrangements that give rise to conflicts.
The office also summarized the areas on which its staff will focus during an examination. These include the following:Reasonable basis for recommendation.
The staff will look at whether representatives and their firms meet their obligations under the securities laws and self-regulatory organization (SRO) rules with regard to selection of account types—including a rollover to an IRA—performing diligence on investment options, initial investment recommendations and ongoing monitoring of account investments. Management of conflicts of interest.
The staff will review business structure, personal relationships and relationships with service providers to determine what conflicts exist and what steps are being taken to manage them. Such steps may include processes and procedures to identify, mitigate and/or disclose material conflicts of interest. In particular, the staff will look at how firms and their representatives are compensated, to determine whether compensation arrangements increase the risk that certain products or services will be recommended because of them.Supervision and compliance controls
. To confirm whether registrants meet their obligations to supervise registered personnel, the staff will review a registrant’s controls, oversight and supervisory policies, as well as its procedures pertaining to retail retirement investors. One area of focus will likely be how rollover education and recommendations are managed.Marketing and disclosure.
The staff will also confirm that marketing materials and disclosures provided to retirement investors are not deceptive or misleading. OCIE will confirm that the written materials are accurate and do not mislead, that disclosures regarding fees are complete and accurate, and that credentials and other endorsements are valid.
As noted, OCIE’s announcement of the ReTIRE Initiative is made in the wake of the DOL’s proposal to change its regulation that defines “investment advice” and several of the prohibited transaction exemptions (PTEs) on which advisers currently rely. Most significantly, the department introduced a new exemption called the “best interest contract,” or BIC, prohibited transaction exemption; this requires advisers to act in the best interests of the IRA owner and other retail retirement investors when selling products and services to them.
The BIC PTE also requires, among other things, that firms warrant that they do not utilize compensation strategies that “tend to” cause the representative to act in a manner not in the best interest of the investor. In light of the conditions of the BIC exemption, one may surmise that the department does not believe the securities laws and SRO rules are adequate to protect retail retirement investors.
The announcement of the ReTIRE Initiative fails to mention the DOL’s proposed rulemaking. Rather, it is presented as a warning about future OCIE activity and an opportunity for firms to review their compliance procedures related to retail retirement accounts in anticipation of an examination by the staff. The announcement may also serve as notice that the SEC has and will exercise enforcement jurisdiction in this area. It remains to be seen if and how OCIE and the department will coordinate their efforts. In the meantime, firms would do well to review their compliance activities involving retail retirement investors in anticipation of a visit from OCIE staff.
David C. Kaleda is a principal in the Fiduciary Responsibility practice group at the Groom Law Group in Washington, D.C. He has an extensive background in the financial services sector. His range of experience includes handling fiduciary matters affecting investment managers, advisers, broker/dealers, insurers, banks and service providers. He served on the DOL’s ERISA Advisory Council from 2012 through 2014.