How the SEC’s Reg BI Will Affect Retirement Plan Sponsors and Participants

The Securities and Exchange Commission’s (SEC)’s Regulation Best Interest (Reg BI) isn’t another version of the Department of Labor’s (DOL)’s Fiduciary Rule, says Anne Tyler Hall, principal and attorney at Hall Benefits Law in Atlanta.

As such, the effect on retirement plan sponsors is more limited, and most of the effect will be seen by retirement plan participants, particularly at the point of rolling over retirement plan balances. However, Hall Benefits Law suggests being proactive with plan participant obligations. “Know when the rules apply to participants, understand how they apply, and have a thumb on what service providers are offering, the scope of advice they are giving and just a general understanding of how broker/dealers (B/Ds) are interacting with participants,” Hall says.

What is the Reg BI?

Hall explains that the SEC’s Reg BI is limited in scope. It only applies to recommendations regarding sales of securities, not insurance products or other investments. It doesn’t imbue fiduciary status on B/Ds when engaging in certain activities. It doesn’t have any rights or remedies but falls back on existing securities laws and Financial Industry Regulatory Authority (FINRA) rules and arbitration of claims. She adds that it does not apply at the plan level—sponsors are not protected when they change providers or set up a plan—but does apply at the participant level and for the self-employed.

According to Hall, the Reg BI puts brokers under a four-part general obligation. They must provide disclosure at time of recommendation that they are acting as a broker, not an investment adviser, material costs of the recommendation, scope of services and description of material facts about conflicts-of-interest related to the recommendation.

There is a care obligation, that B/Ds must exercise diligence, care and skill when it recommends a transaction. There is a conflict avoidance obligation which requires B/Ds to establish written policies and procedures to identify conflicts by disclosing or eliminating them. Hall notes there is not really any repercussions. A B/D can disclose a conflict and still work with an investor—the investor could walk away after the disclosure.

There is also a compliance obligation which requires B/Ds to maintain and enforce policies and procedures reasonably designed to comply with the new rules.

The Reg BI established a relationship summary form (Form CRS) to ensure investors understand the relationship with the B/D and the B/D’s duties towards them.

Hall reiterates that the Reg BI only applies to recommendations relating to sales of securities. A retirement plan rollover is the broadest example and the one most frequently where the industry says this type of rule is needed, she says.

Nancy Hendrickson, partner and co-chair of the financial services practice group at Kaufman Dolowich & Voluck in Chicago, says the Reg BI’s use of the term “retail investors” includes retirement plans and participants. She notes that a lot of advisory firms and B/Ds have already done a lot of work in this area in anticipation of the DOL rule. As a result, most brokers providing services (not fiduciary ) to plan sponsors and the plans themselves have revised or updated practices specifically regarding fees and fee disclosure.

Hendrickson adds that changes to service contracts already took place, and as a result, a lot of B/Ds started working in a fiduciary capacity. “The Reg BI will make it easier for those who have held out and those just starting to take fiduciary responsibility to compete. Sponsor will be more open to working with B/Ds as opposed to strictly investment advisers,” she says.

Hendrickson adds, “Plan sponsors will see more competition among B/Ds and advisers and will be seeing a lot more choices offered. Plan sponsors will need to understand their choices, do due diligence and document reasons for deciding which investment to offer.”

The plan participant experience

“Since the rule depends heavily on disclosure, retirement plan participants will need financial literacy they don’t currently have—they will have to learn on their own. But firms can compete better if they provide education,” Hendrickson says. “Before, advisers and B/Ds felt constrained by a line they couldn’t cross between education and advice. Now that everyone knows they will have to act in the customer’s best interest, hopefully it will result in better education.”

Hall says it is “absolutely a best practice for plan sponsors to vet service providers that will be working with participants.” She points out that whenever a plan sponsor gets involved in service providers dealing with participants it implicates some fiduciary duty, but not vetting and saying “good luck” to participants also implicates fiduciary duty.

In some cases a plan sponsor may have a service agreement with a provider that may be giving rollover advice to participants, Hall says. In that case, the plan sponsor needs to make sure the service provider is abiding by the SEC BI.

But, in most cases, there is limited fiduciary responsibility for plan sponsors because the rule really governs the B/D-participant relationship. “At the same time it would be a best practice for plan fiduciaries to, at a minimum, have an understanding of how the rule applies and when it applies and provide general guidance to participants about reviewing service provider agreements carefully,” Hall says. She suggests providing very general language to participants about how, when making important decisions relating to their plan account, they should be cautious, review agreements carefully and make sure they understand the scope of services and any conflicts-of-interest.

Still, Hendrickson says, it will remain the case that the plan sponsor will not be involved at the point of a participant’s rollover. “Participants will be left to their own devices when navigating through everything.”