In Practice September 26, 2016

DOL Conflict of Interest Rule Could Force Staff Changes

More than half of broker/dealers surveyed by the LIMRA Secure Retirement Institute believe some of their advisers will retire rather than sell under the new.
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Fifty-four percent of broker/dealers (B/Ds) surveyed believe some of their advisers will retire rather than sell under the strict  requirements for compliance with the Department of Labor’s (DOL) new fiduciary rule, according to a LIMRA Secure Retirement Institute (LIMRA SRI) study.

The research matches other recent analyses to emerge showing that in some important ways the DOL rulemaking is redefining what it means to be an adviser. The LIMRA SRI research reveals most B/D firms, about eight in 10, “plan to employ both the Prohibited Transaction 84-24 exemption and the Best Interest Contract exemptions allowed under the new rule,” while nearly three-quarters will use so-called fee-leveling or fee-offset strategies. Most firms said they will employ multiple strategies in order to ensure compliance, LIMRA SRI observes.

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“Because the rule increases advisers’ liability, B/Ds also expect their advisers to stop providing advice to clients with lower IRA account balances,” says Kathy Krozel, research director, LIMRA Distribution Research. “At a time when more Americans need access to advice, it appears that the new DOL rule may actually reduce access for middle income consumers.”

The Institute found that two in three B/D firms “believe the increased cost of compliance will ultimately be passed on to the consumer,” while the vast majority agree that the rule “will increase consolidation in the industry,” most likely impacting smaller firms.

“Historically our research has shown that larger companies benefit from the economies of scale when there is significant change in the market,” explains Krozel. “Smaller firms may be unable to afford the high cost of implementing the changes needed to comply with the rule and some may opt to merge with their larger counterparts.”

Other research highlights show a strong majority (75%) of B/Ds believe the risk of litigation would be exacerbated by the DOL fiduciary rule. “Seven in 10 think the rule will force changes to adviser compensation practices and structures,” survey data shows. “The cost of compliance—both in changing business practices and reporting—round out the last two impacts cited by B/Ds.”

Additional research and information is available online here. 

Compliance September 26, 2016

Does Brokerage Window Require Company Stock Offering Registration?

The SEC recently weighed in on whether offering a brokerage window in a 401(k) through which investments in employer securities can be made involves an offer of employer securities requiring Securities Act registration.
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The Securities and Exchange Commission (SEC) Division of Corporate Finance issued a Compliance and Disclosure Interpretation (CDI) saying a 401(k) plan sponsor that does not offer an employer securities fund in the plan but offers a brokerage window through which investments in employer securities can be made does not have to register an offer of employer securities if no attempt to direct investments in employer securities is made.

According to the CDI, whether this situation involves an offer of employer securities requiring Securities Act registration depends on the extent of the employer company’s involvement.

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In Release 33-4790, the SEC discussed whether registration is required for employer securities offered to employees through a stock purchase plan. That release framed the question as whether there is an “attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value” within the meaning of Securities Act Section 2(a)(3), the CDI noted. The SEC said that a determination of whether registration is required turns on the degree and type of participation by issuers or their affiliates in the particular program. In the context of an open market stock purchase plan, it said that registration would not be required if all communications of a soliciting character are furnished by or in the name of a broker, and the issuer or affiliate does no more than: 1) announces the existence of the plan; 2) makes payroll deductions; 3) makes names of employees available to the broker; and 4) pays no more than its expense of payroll deductions and reasonable fees and expenses for commissions, bookkeeping and custodial services.

In the context of providing a self-directed brokerage window in which plan participants could trade in employer securities with employee contributions, where the employer company and the 401(k) plan do no more than describe the self-directed brokerage window as part of the investment alternatives under the 401(k) plan, make payroll deductions, and pay administrative expenses not in any way tied to particular investments selected by employees and take no action to draw employees’ attention to the possibility of investing in employer securities through the brokerage window, the staff would not consider the employer company to be offering its securities to its employees for purposes of Securities Act registration.

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