In the Media

Closing loopholes or blocking access? Reactions to the final DOL rule, By Tobias Salinger

Tiffany Zachary — Thu, 25 Apr 2024 21:19:02 +0000

Closing loopholes or blocking access? Reactions to the final DOL rule, By Tobias Salinger Tiffany Zachary Thu, 04/25/2024 - 4:19pm

FinancialPlanning (April 25, 2024) - By Tobias Salinger

Supporters and opponents began weighing in with their reactions about a minute or so after the Labor Department issued the final version of its retirement advice rule earlier this week.

As shown by the roundup of 18 statements in response to the "retirement security rule" below, the groups praising the regulation include the AARP, the CFP Board, the National Association of Personal Financial Advisors and the Consumer Federation of America, while the ranks of those against it comprise the Insured Retirement Institute, the Securities Industry and Financial Markets Association, the National Association of Insurance Commissioners and other groups. The latter commenters will almost certainly file a lawsuit challenging the rule in court and push for Congress to use its power to block the regulation over the next two months.

Otherwise, the rule will expand the fiduciary duty requiring recommendations by financial advisors and other retirement professionals for rollovers from 401(k) plans to individual retirement accounts or certain insurance products to put a clients' best interest first.

The regulation takes effect Sept. 23, although some parts carry a one-year transition period after that date for full implementation, according to a Labor fact sheet. While many advisors already follow fiduciary standards with all of their clients, there is "always going to be a big impact" from rules of this kind on registered investment advisory firms and other professionals working with retirement savers, according to Leila Shaver, the founder of compliance firm My RIA Lawyer.

"It takes a lot of money to implement the processes and supervision required to comply with the rule," she said in an interview.

The rule entails "different work and disclosure" but "not necessarily more work and disclosure" for most advisors, according to David Lau, CEO of DPL Financial Partners, a fee-only insurance consulting network that RIAs use for annuities and other products without commissions. Asked about the likelihood that the industry will file a lawsuit to try to overturn the rule, Lau put the possibility at "about 1,000%," but he said that this regulation is "built better to stand up to challenge" than the one overturned by an appeals court decision six years ago.

"Retirement is such a critical and sometimes vulnerable financial time for a consumer," Lau said. "To require that they're getting fiduciary advice about such important decisions I think is such complete common sense."

In contrast to many other insurance groups that are decidedly hostile to the regulation, Lau rejected the suggestion that it could threaten access to advice about retirement products.

"Annuities are really important, good products," he said. "To have the confidence that you're going to be able to get them from a fiduciary in a low-cost manner will only help expand the industry over time."

Scroll down the slideshow to see reactions from 18 different advocacy groups, professional associations and government agencies. For a look at FP's analysis of the Labor Department's issuance of the rule, click here. And to look at two potential roadblocks to it going into effect ahead of the election, follow this link.

Industry Players Weigh In on the DOL's New Fiduciary Definition, By Allison Bell

Tiffany Zachary — Thu, 25 Apr 2024 19:14:46 +0000

Industry Players Weigh In on the DOL's New Fiduciary Definition, By Allison Bell Tiffany Zachary Thu, 04/25/2024 - 2:14pm

Think Advisor (April 25, 2024) - By Allison Bell

Seth Friedman, who once distributed annuities himself, is wondering how the Labor Department’s new final retirement investment fiduciary definition regulation will actually affect the flow of cash through the annuity distribution ecosystem.

The Investment Company Institute is still going through the 466-page regulation packet.

A group that represents investors’ lawyers is happy.

Many groups in the life insurance and annuity sector are furious that the department is disrupting the mechanisms they use to provide retirement planning products and advice at a time when tens of millions of U.S. workers have no retirement savings at all.

The Labor Department set off a wave of reactions by completing work on its fourth effort to expand efforts to regulate people and companies that help retirement savers make investment decisions.

The department has used the retirement investment advice fiduciary definition to apply Employee Retirement Income Security Act fiduciary requirements on anyone who regularly provides investment recommendations for people who are using 401(k) plan accounts, individual retirement accounts or similar arrangements to build their nest eggs.

Department officials say they are able to set broad standards because ERISA gives them strong authority to regulate the assets accumulated in accounts that benefit from federal retirement savings tax incentives.

Here’s a sampling of reactions to the final rules. The comments and statements have been edited for length.

Practitioners

Seth Friedman, a former annuity wholesaler and owner of AdvisorSquawk.com:

No one whom I have spoken with believes this regulation will cut [annuity industry] fees, unless this perspective is based on the advisor and their affiliated insurance agency forgoing commission as a result. If that’s the case, I suspect the industry will react by increasing interest rates on multi-year guaranteed annuities and participation rates on fixed indexed annuity products.

This regulation will likely be revenue-neutral for annuity providers with one exception: Both insurance companies and broker-dealers will likely end up having to add personnel in their compliance departments to address outcomes brought by these new rules. Aside from that point of view, the rest of what occurs is up in the air.

One unknown effect of the regulation is how this issue will impact errors and omissions coverage for all related entities. Clearly, these costs are going to increase for all parties as a result of the enhanced regulatory risk.

Finally, the broker-dealer industry is very adept at squeezing the last dollar out of any opportunity. These firms are likely to seek enhanced revenue-sharing funds as a result of commission being left on the table.

Annuities are frequently referenced as being sold rather than bought by a given client. Once this regulation goes live, I suspect there will be a lot of focus on how the funds that were previously used to pay commission are allocated.

Jack Elder, senior vice president of advanced markets at CBS Brokerage:

Many Americans are financially unprepared for retirement, with the retirement gap in the trillions. Yet, the DOL’s Fiduciary Rule 3.0 would disproportionately impact savers in lower-income brackets by limiting consumer choice.

The rule classifies commissions as “junk fees” in favor of a fiduciary-only model.

This one-size-fits-all approach may make it harder for advisors to provide some clients with comprehensive financial advice. Moreover, the rule unnecessarily overlaps established federal and state consumer protections.

Howard Sharfman, senior managing director at NFP Insurance Solutions:

Some companies will not want that fiduciary liability. The industry will shrink.

I believe in regulation, but this is too much.

Organizations

Eric Pan, CEO of the Investment Company Institute:

ICI is reviewing the DOL’s final rule, bearing in mind the concerns we raised that it may raise costs and interfere with middle-class savers’ access to the guidance, products and innovative tools they rely on to meet their retirement goals.

We have always strongly supported the principle that financial professionals should act in their clients’ best interests when offering personalized recommendations, as the SEC’s Regulation Best Interest for broker-dealers already requires.

We will examine the rule in detail to see how the DOL has responded to the hundreds of comment letters it received providing detailed public input on the proposal.

Supporters

Micah Hauptman, director of investor protection at the Consumer Federation of America:

Financial professionals, including most prominently insurance professionals, consistently characterize themselves as in relationships of trust and confidence with their customers who rely on their advice.

These financial professionals’ business models shouldn’t be structured to bilk those customers out of a secure and independent retirement, then evade accountability for those actions.

We expect industry opponents who don’t want to or aren’t capable of competing for customers based on the cost and quality of their services will try to defeat these landmark rules in both Congress and the courts, as they did the last time the DOL attempted to strengthen protections for retirement savers. This time, however, the industry opponents’ efforts will not be successful.

David Lau, CEO of DPL Financial Partners, a web-based platform for commission-free annuities:

Investment recommendations for retirement savings need to meet a fiduciary standard — this should be self-evident and inarguable. Retirement is a critical and vulnerable financial time for most Americans, and they need to be confident that their financial advisor is giving them the best advice for their circumstances.

We applaud the Department of Labor’s Retirement Security Rule as an important step toward ensuring that retirement investment advice is delivered in a fiduciary manner. The rule adds a critical layer of definition and transparency, which will provide retirement investors with assurance they are receiving advice in their best interest and an understanding of how the person making a retirement investment recommendation is being compensated.

We strongly believe this rule will increase the availability of fiduciary retirement advice and solutions. Oftentimes, regulation can spur market innovation.

Over the past several years, insurance carriers have been bringing commission-free products to market for fiduciary advisors to use with their clients at the same time as advisors increasingly embrace fee-based compensation models and fiduciary commitments; this rule will only accelerate that innovation and transition.

Annuities are critically important financial tools for retirement savers tasked with funding retirements that can span 30 years or more. But a non-fiduciary sales approach has tarnished their reputation and limited adoption.

The insurance industry has lagged behind the larger trend: Most of financial services has moved away from commissions to fee-based, fiduciary models, and it is only a matter of time before consumers demand that insurance does the same.

The Retirement Security Rule reflects common-sense best practices. It is time for the industry to put consumers first by aligning with modern compensation models and transparent business approaches.

This rule is a win for retirement investors who need advice they can trust. In the short term, it will protect investors from the impacts of conflicted advice. In the long term, it will reduce consumer skepticism and engender trust, which will instill consumer confidence in these important products.

Joseph Peiffer, president of the Public Investors Advocate Bar Association:

The newly finalized DOL rule, which imposes a fiduciary duty on advisors, ensures that they will have to put their clients’ financial interests ahead of their own. It’s not a minor issue. Conflicted advice costs Americans billions of dollars a year. This rule will finally put a stop to that.

We’re going to be hearing from Wall Street and the insurance industry that the sky is falling and that their businesses are in jeopardy. That couldn’t be farther from the truth. Financial advisors are not going to go extinct.

In fact, advisors already benefit from the widespread public perception that it’s their job to act in their clients’ best interests. Frankly, it’s an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect.

PIABA strongly urges Congress to reject the inevitable industry efforts to block this rule to perpetuate its multibillion-dollar cash grab from unsuspecting families.

Advisors face new U.S. fiduciary requirements, By James Langton

Tiffany Zachary — Wed, 24 Apr 2024 21:25:42 +0000

Advisors face new U.S. fiduciary requirements, By James Langton Tiffany Zachary Wed, 04/24/2024 - 4:25pm

Investment Executive (April 24, 2024) - By James Langton

Labor Department finalizes fiduciary rule for retirement advice

The U.S. Department of Labor (DOL) has finalized a controversial rule designed to raise conduct standards on financial advisors who provide retirement advice.

The final rule, which revises the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA), requires advisors to provide investment recommendations that meet high standards of care and prioritize investors’ interests.

Firms that oversee advisors are also required to have policies and procedures in place that manage conflicts of interest and ensure that their reps adhere to the fiduciary standard.

“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions,” said acting Secretary of Labor Julie Su in a release.

The new rule, which takes effect on Sept. 23, applies when advisors give compensated investment advice to retirement plan participants, individual retirement account owners and officials responsible for administering retirement plans and managing their assets.

The DOL said the rule will also ensure that advisors can compete on a level playing field, instead of under a system of disparate standards based on the types of products being recommended.

The agency’s effort to raise conduct standards in the industry started with a rule proposal back in 2016, which fell to a legal challenge in 2018. In 2020, the U.S. Securities and Exchange Commission (SEC) undertook its own effort to raise standards on advisors with the adoption of Regulation Best Interest (Reg BI).

The DOL said it is coordinating with the SEC, the U.S. Treasury Department, and the IRS, to ensure that its new rule aligns with the Reg BI requirements.

The new rule was applauded by a group of lawyers that frequently represents harmed investors, the Public Investors Advocate Bar Association (PIABA), which noted that research has found that investment recommendations driven by advisors’ financial interests, costs investors over US$17 billion a year.

“We’re going to be hearing from Wall Street and the insurance industry that the sky is falling and that their businesses are in jeopardy. That couldn’t be farther from the truth. Financial advisors are not going to go extinct,” said Joseph Peiffer, president of the PIABA, and founding partner of the law firm, Peiffer Wolf Carr Kane Conway & Wise, in a release.

“In fact, advisors already benefit from the widespread public perception that it’s their job to act in their clients’ best interests. Franky, it’s an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect,” he added.

“PIABA strongly urges Congress to reject the inevitable industry efforts to block this rule to perpetuate its multibillion-dollar cash grab from unsuspecting families,” he said.

Industry lobby group, the U.S. Securities Industry and Financial Markets Association (SIFMA) said it would closely review the final rule.

“As proposed, the rule conflicted with existing federal securities regulation — specifically [Reg BI] — and would likely limit investors’ access to advice and education,” said Kenneth Bentsen, Jr., president and CEO of SIFMA, in a release.

“Stakeholders have been quite explicit on the need to address these conflicts and we will be reviewing the conflict-related text as well as other relevant text on the material flaws we raised in our comments,” he said.

Fund industry trade group, the Investment Company Institute (ICI), said it is closely reviewing the final rule as well.

“We have always strongly supported the principle that financial professionals should act in their clients’ best interests when offering personalized recommendations, as the SEC’s Regulation Best Interest for broker-dealers already requires,” said ICI president and CEO Eric Pan in a statement.

“We will examine the rule in detail to see how the DOL has responded to the hundreds of comment letters it received providing detailed public input on the proposal,” he added.

DOL Unveils Final Fiduciary Rule for Retirement Accounts, By Miriam Rosen

Tiffany Zachary — Tue, 23 Apr 2024 19:31:00 +0000

DOL Unveils Final Fiduciary Rule for Retirement Accounts, By Miriam Rosen Tiffany Zachary Tue, 04/23/2024 - 2:31pm

AdvisorHub (April 23, 2024) - By Miriam Rozen

The U.S. Department of Labor on Tuesday said it has finalized a fiduciary rule governing retirement accounts that will close loopholes and widen the swath of financial advisors who must put their clients interests ahead of commissions or face penalties and restitution.

The final rule, which takes effect September 23, updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code. When proposed last year, it drew objections from trade associations for the brokerages and other institutions in the securities industry, who argued it would increase regulatory and compliance costs.

The DOL in an announcement on Tuesday said that the final rule and a related prohibited transaction exemption will “require trusted investment advice providers to give prudent, loyal, honest advice free from overcharges.”

“These fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests — financial or otherwise — at the retirement savers’ expense,” the DOL added.

The rule as proposed in November would apply a fiduciary standard to recommendations from advisors such as rolling over assets from a workplace retirement plan to an Individual Retirement Account. It would also likely result in additional scrutiny for some high-fee annuity products.

“America’s workers and their families rely on investment professionals for guidance as they save for retirement,” DOL Acting Secretary Julie Su said in the announcement. “This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest.”

When President Joe Biden rolled out the rule last year, he described it as closing “loopholes,” and said, “Some advisors and brokers steer their clients toward certain investments not because it’s the best interest of the client [but] because it means the best payout for the broker. I get it, understand it. But I just want you to know we’re watching.”

The final rule could still face court challenges or congressional scrutiny. The Financial Services Institute, a trade group of independent broker-dealers, said in a statement that it is reviewing the rule and raised an issue with the “abnormally rapid” pace at which it was issued following a comment period last year.

“We remain concerned that the final rule will have a negative impact on Main Street Americans’ access to financial advice as they attempt [to] save for a dignified retirement,” FSI said in a statement.

The Public Investors Advocate Bar Association (PIABA), a member organization for plaintiff lawyers representing investors, issued a statement welcoming the new rule, noting that studies have said the existing loophole has cost retirement savers and their families $17 billion annually.

“Financial advisors are not going to go extinct,” Joseph Peiffer, president of PIABA and founding partner of the law firm Peiffer Wolf Carr Kane Conway & Wise, said in a written statement. “Frankly, it’s an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect.”

Who Can You Trust for Retirement Advice? New Rules Strengthen Protections, By Tara Siegel Bernard

Tiffany Zachary — Tue, 23 Apr 2024 19:29:38 +0000

Who Can You Trust for Retirement Advice? New Rules Strengthen Protections, By Tara Siegel Bernard Tiffany Zachary Tue, 04/23/2024 - 2:29pm

Yahoo News (April 23, 2024) - By Tara Siegel Bernard

New rules will require more investment professionals to act in their customers’ best interest when providing advice about their retirement money.

When you walk into a financial adviser’s office, you expect them to put your best interests above all else — in the same way a doctor would, rather than, say, a car salesman. But many people don’t realize that the rules financial professionals must follow vary, depending on where they work and what products they’re selling.

One of those federal regulations, which governs retirement plans, was just tightened: The Biden administration announced new rules on Tuesday that will require more financial professionals to adhere to the highest standards when providing financial advice about your retirement money.

Starting Sept. 23, investment professionals who offer services as trusted advisers will be required to act as fiduciaries — that is, they’d be held to the highest standard, across the investment landscape — when customers pay them for advice on individual retirement accounts, 401(k)s and similar buckets of tax-advantaged dollars. The goal is to minimize conflicts of interest, or at least ensure that they aren’t influencing investment professionals’ advice that lines their pockets at the customers’ expense. The rule, which will be published in the Federal Register on Thursday, will be fully effective in late 2025.

The changes, issued by the Department of Labor, which oversees retirement plans, close loopholes that made it easier for many investment professionals to avoid fiduciary status — including, for example, when workers roll over their savings from a 401(k) plan to an individual retirement account. Those transactions, which totaled nearly $800 billion in 2022, weren’t always covered by these investor protections, even though these sums often amount to a person’s life savings.

“If you’re a retirement investor looking for help with how to manage your retirement investments, it’s only reasonable that you get advice that is prudent, loyal and doesn’t involve misleading you,” said Tim Hauser, deputy assistant secretary for program operations of the Employee Benefits Security Administration at the Labor Department. “It shouldn’t matter what product you’re recommending, and that’s what the rule does.”

This isn’t the first effort to update the federal retirement law known as ERISA, which was enacted in 1974 to oversee private pension plans before 401(k)s existed. Strengthening its protections has been the subject of intense debate for more than a decade, over three presidential administrations.

Indeed, critics (including financial industry stakeholders) say the new regulation — initially introduced in October — was rushed, but the Labor Department has been working on different versions since it introduced its first proposal in 2010. The Obama administration issued a more stringent rule in 2016, but the Trump administration hit the brakes before it was fully implemented. An appeals court later struck it down in 2018.

Agency officials said they took comments from the financial industry and others into account and made several changes that are reflected in the final rule. But Lisa M. Gomez, assistant secretary for Employee Benefits Security, said the investor protections remain. “There is nothing in these clarifications or changes that one should interpret as a watering down or a real change in position from the proposal,” she said on a media briefing call.

When the onus is on individuals to save and invest for a financially secure retirement, with money that must last through advanced age, investor protections are paramount. Still, individuals might be wondering why they aren’t entitled to fiduciary-level advice on all of their money, all of the time, regardless of what account it sits in or what type of product they’re investing in.

Here’s an overview of how the rules have changed and what it means for you — and how to find fiduciary-level professionals, regardless of the political climate.

What’s changed and where do these rules apply?

The regulation redefines who is considered an investment fiduciary. Before the changes, financial professionals had to meet a five-part test before they were held to that standard — and one part stated that the person making the recommendation must provide the advice on a regular basis. That means one-time recommendations were not necessarily included, which left 401(k) rollover guidance at risk.

The new rule aims to level the playing field for all financial professionals — including investment brokers and insurance salespeople — who describe themselves as trusted advisers when providing advice about your retirement money. It doesn’t matter whether they’re recommending mutual funds, stock investments, insurance products like annuities, illiquid real estate investments — it’s all covered. Investment brokers selling retirement plans to businesses would also be held to the fiduciary standard.

Why is fiduciary status important? What does it even mean?

Fiduciaries under the federal law known as ERISA must follow strict rules of conduct and avoid conflicts of interest. That means they can’t provide advice that affects their compensation, unless they meet certain conditions to ensure investors are protected. This includes putting policies in place to mitigate those conflicts. Investment professionals must also be upfront with customers about their roles as fiduciaries — if they have conflicts, and many do, they must acknowledge it in writing.

That should go a long way in helping retirees who land in their offices, said Joe Peiffer, a founding partner of Peiffer Wolf Carr Kane Conway & Wise, a law firm in New Orleans. He said he has represented thousands of investors who have received poor advice, including from insurance salespeople who call themselves financial advisers when selling indexed annuity products and universal life policies — often with “disastrous” results.

“They’re exactly the kind of case that the new D.O.L. rule is trying to address,” he said, referring to the Department of Labor. “Because, currently, when we sue these ‘advisers,’ their response is that they are nothing more than insurance salesman that do not have a fiduciary duty.”

I want to work with someone who will always act in my best interest, on all of my money, not just retirement accounts.

No financial adviser is entirely conflict-free, but the ecosystem in which your adviser works matters — and will influence what type of conflicts are embedded in the way they do business. Some brokers, for example, may be paid more to sell one product over another product. Or, the firm itself might have complex revenue sharing agreements, which is when a mutual fund company makes payments to a brokerage firm — and some funds may pay a firm fatter fees than others.

Under the new rule, any financial professional making recommendations must have “policies and procedures to manage conflicts of interest and ensure providers follow these guidelines,” department officials said.

The simplest way to buy advice is to hire a “fee-only” independent certified financial planner who is a registered investment adviser, which means they are required to act as fiduciaries when providing investment advice about securities (stocks, mutual funds and the like). As part of that fiduciary duty, they must eliminate conflicts or disclose them.

“Your odds of conflicts go up, the longer their disclosures are,” said Benjamin Edwards, a professor at the William S. Boyd School of Law at the University of Las Vegas.

What questions should I ask when choosing an adviser?

There are several, but the most important: Are you a fiduciary who promises to put my interests ahead of yours 100 percent of the time with 100 percent of my money? How do you get paid — and will you get paid more for recommending one investment over another? What’s your investment philosophy — does it involve mostly low cost index-based investments?

Oh, and by the way, will you sign this fiduciary pledge? If they refuse, find a new adviser who will.

Where can I find a trusted adviser?

There are more places now than there have been in the past: XY Planning Network, Garrett Planning Network and the National Association of Personal Financial Advisors (NAPFA) are all trade groups whose members accept only fee-based compensation, which minimizes their conflicts of interest. They also allow you to search for professionals based on their expertise (retirement planning, for example, or stock option exercise strategies), “You don’t want the adviser to be learning about how to help you on the fly,” said Alan Moore, a financial planner and co-founder of XY Planning Network.

There are also newer entrants, including Domain Money and Facet, which connect people to independent financial planners who get paid flat fees.

Roboadvisers, or companies that lean heavily on technology to manage your investments but also often have human financial advisers, may be a solid option for people who are just starting out — or who have an investment plan they want to put into place and let run on autopilot.

One of the most valuable services an adviser can provide is saving us from ourselves, in the darkest market moments, when an individual may be e most likely to give into emotion and sell investments (or buy) at the worst possible time. Just make sure the adviser is a fiduciary.

Tara Siegel Bernard writes about personal finance, from saving for college to paying for retirement and everything in between. More about Tara Siegel Bernard

Who Can You Trust for Retirement Advice? New Rules Strengthen Protections, By Tara Siegel Bernard

Tiffany Zachary — Tue, 23 Apr 2024 19:25:54 +0000

Who Can You Trust for Retirement Advice? New Rules Strengthen Protections, By Tara Siegel Bernard Tiffany Zachary Tue, 04/23/2024 - 2:25pm

New York Times (April 23, 2024) - By Tara Siegel Bernard

New rules will require more investment professionals to act in their customers’ best interest when providing advice about their retirement money.

Here’s an overview of how the rules have changed and what it means for you — and how to find fiduciary-level professionals, regardless of the political climate.

What’s changed and where do these rules apply?

Why is fiduciary status important? What does it even mean?

I want to work with someone who will always act in my best interest, on all of my money, not just retirement accounts.

“Your odds of conflicts go up, the longer their disclosures are,” said Benjamin Edwards, a professor at the William S. Boyd School of Law at the University of Las Vegas.

What questions should I ask when choosing an adviser?

Oh, and by the way, will you sign this fiduciary pledge? If they refuse, find a new adviser who will.

Where can I find a trusted adviser?

There are also newer entrants, including Domain Money and Facet, which connect people to independent financial planners who get paid flat fees.

Tara Siegel Bernard writes about personal finance, from saving for college to paying for retirement and everything in between. More about Tara Siegel Bernard

Former Goldman Advisors Trash “Frantic” United Capital Sale In Laws, by Patrick Donachie

Tiffany Zachary — Thu, 11 Apr 2024 17:42:05 +0000

Former Goldman Advisors Trash “Frantic” United Capital Sale In Laws, by Patrick Donachie Tiffany Zachary Thu, 04/11/2024 - 12:42pm

WealthManagement.com (April 10, 2024) - By Patrick Donachie

Nine former advisors are suing United Capital over its attempts to move arbitration proceedings from FINRA to another venue, accusing the firm of “pure gamesmanship” and “forum shopping.”

A group of former United Capital advisors is taking their former employer to court for its attempt to move ongoing arbitration proceedings against those advisors out of FINRA, arguing the “very essence of arbitration” could be compromised.

In the complaint filed in New York State Court, the nine advisors in the case take Goldman Sachs to task for its hurried sale of United Capital last year, arguing the decision to unload the firm after only four years left advisors in an untenable position.

“This frantic announcement, given in the context of four tumultuous years of Goldman’s mismanagement of United Capital, gave rise to a miasmic cloud of uncertainty and unanswered questions that choked (the advisors’) ability to advise their clients,” the suit read.

Nine former advisors brought the suit, including Michael Scott Duncan, Dwayne Grady, Caroline Girgis, Alan McClain and Amanda Pilkerton. All were advisors with the Ayco Company and United Capital under Goldman Sachs Personal Financial Management.

The advisors live and work throughout the country, including several in Maryland and Texas, as well as Virginia, North Carolina, South Carolina and North Dakota, according to the suit and records with FINRA and the SEC.

In 2020, Goldman Sachs purchased United Capital for $750 million in cash to boost its presence in the retail space, rebranding it as Goldman Sachs Personal Financial Management. But by 2023, the bloom was off the rose; Goldman Sachs put out feelers for a buyer last August.

WealthManagement.com previously reported that the independently-minded advisors at United Capital never found a home at Goldman Sachs. Cary Carbonaro, a former top advisor at United Capital, left in May 2022 and said the wirehouse “killed the firm,” alleging Goldman Sachs put so many restrictions around advisors that they could not function.

The nine advisors in the suit against United Capital were equally unsparing, saying they left Goldman after the wirehouse “announced it was scrambling” to find a buyer for United Capital (Creative Planning purchased United Capital from Goldman last August).

According to the complaint, Goldman’s stewardship of United Capital was “rife with problems” before the sale. The advisors said Goldman failed to hire support staff to replace individuals who left and that the wirehouse implemented suitability analyses “misaligned” with advisors’ clients. According to the suit, Goldman also improperly withheld or changed advisor compensation.

The advisors claimed that after the sale, there was “a well-publicized parade of advisors and their clients” out the door, including the advisors acting as plaintiffs in the complaint. All nine petitioners in the suit ended up at the same firm, Prime Capital Investment Advisors.

After the advisors left Goldman, the firm (and Mercer Advisors, who’d previously employed some of the reps) filed termination statements against several former reps.

Eventually, the back-and-forth between the advisors and United Capital, Goldman and Mercer wound up in FINRA arbitration.

Goldman and United Capital first sued the advisors in FINRA for allegedly violating restrictive covenants by going to work for Prime Capital after leaving Goldman. The advisors fired back with their counterclaims, claiming the restrictive covenants were “unenforceable” and that Goldman and Mercer had made “false and defamatory statements” on some of the advisors’ Forms U5 in describing their resignations.

However, the advisors’ lawsuit centers on United Capital’s attempt to move its arbitration battle with the reps out of FINRA and under the auspices of the American Arbitration Association (AAA), another arbitration forum.

United Capital claimed the move was necessary because the firm is not a member of FINRA. Still, the plaintiffs argued United Capital had already previously submitted (and withdrawn) claims against the advisors via FINRA arbitration, indicating they could arbitrate within that system. Only after withdrawing those claims did United Capital opt for the AAA, which the advisors called an example of “capricious forum shopping.”

Indeed, the group of plaintiffs argued that FINRA was the only forum “capable of arbitrating all of the claims” asserted by Goldman and United Capital, as well as the advisors’ counterclaims and that they’d had previous agreements with the former firms mandating that any claims be argued in FINRA arbitration.

To split them could leave the advisors litigating the same issues in two venues “with the possibility of inconsistent rulings and procedures,” according to the suit.

“So it is pure gamesmanship—or a divide-and-conquer strategy United Capital hatched with Goldman—to try to force Petitioners to litigate their claims against United Capital in another forum, but that gamesmanship would deprive Petitioners of effectively litigating their claims,” the suit read.

Goldman Sachs did not respond to requests for comment, nor did attorneys representing Duncan and the other advisors. United Capital did not respond as of press time.

But if United Capital can arbitrate in FINRA proceedings, why would the firm want to move its claims against the former advisors out of that venue?

AAA arbitration can be costly in comparison with FINRA proceedings, which can make it difficult for cash-strapped plaintiffs to prosecute their claims, according to Joe Peiffer, a founding partner with the New Orleans-based law firm Peiffer Wolf Carr Kane Conway & Wise and current president of the Public Investors Advocate Bar Association (PIABA).

Peiffer agreed with the advisors that splitting the cases would burden them more, as they have to take the time, energy and money to fight to stay out of AAA. If they lose, it can be expensive to arbitrate within AAA compared with FINRA, and they’d have to litigate their claims twice (in AAA and FINRA proceedings) with the same basic facts, according to Peiffer.

“This does double duty for the defendants,” Peiffer said. “It flies in the face of judicial expediency.”

The Prime Capital advisors aren’t the only cadre of former United Capital reps trying to keep the firm in FINRA arbitration.

The same week Duncan and the Prime Capital advisors filed their suit, Robert Davenport and eight others sued United Capital in New York State Court. Like the Prime Capital group, these advisors want the state court to stop United Capital from trying to move its ongoing arbitration claims against their former reps to the AAA and keep them with FINRA.

Like the other case, Davenport and the other petitioners claim they had an agreement with their former firm that claims would be arbitrated before FINRA. The advisors argued that United Capital initially entered FINRA arbitration, only to withdraw their claims and pursue them in AAA.

“Notwithstanding the clear language of the Agreements, (United Capital) has taken the opportunistic position that its claims are not arbitrable before FINRA because it refuses to agree to arbitrate under the FINRA rules and procedures,” the petition read.

Both cases are ongoing.

Despite Rule Change, Finra’s BrokerCheck Tags No ‘Restricted’ Firms, By Miriam Rozen

Tiffany Zachary — Thu, 28 Mar 2024 16:08:01 +0000

Despite Rule Change, Finra’s BrokerCheck Tags No ‘Restricted’ Firms, By Miriam Rozen Tiffany Zachary Thu, 03/28/2024 - 11:08am

AdvisorHub (March 27, 2024) By Miriam Rozen. Nine months after the Financial Industry Regulatory Authority began a process to publicly label firms as “restricted” if they or their brokers had a significant history of misconduct, no firms have received that scarlet letter, according to a review of the regulator’s BrokerCheck database.

Finra’s Rule 4111, which created the framework for identifying a firm as restricted, was a cornerstone of Finra’s long-running effort to rein in broker-dealers that pose high risks to investors. Firms in 2022 began adjusting hiring practices and fired brokers with marks on their records to avoid meeting a threshold to qualify for the restricted designation. A rule amendment to publish the restricted mark on BrokerCheck took effect in June 2023.

“While Rule 4111 was obviously well intended, its implementation leaves a lot to be desired,” said Hugh Berkson, a plaintiff lawyer in Ohio and former president of the Public Investors Advocate Bar Association. “We’re curious what efforts FINRA has made to actually implement the rule.”

A spokesperson for Finra, which has been criticized by lawmakers on both sides of the political aisle in recent months, declined to say if any firms had been identified as restricted or labeled on BrokerCheck.

“The process for evaluating a firm” for the restricted tag started in June 2023 time and “is ongoing,” the spokesperson said.

The review of BrokerCheck records for Finra’s nearly 3,400 active member firms and 12,500 inactive broker-dealers was performed by SLCG Economic Consulting, an expert witness firm that frequently provides expert witness testimony for investors in securities litigation.

Lawyers representing both investors and firms said they do not know of any firms that have been deemed restricted.

“Bad firms continue, like fungus, to thrive in the darkness provided by Finra’s foot dragging on implementing this rule,” said Joe Peiffer, current PIABA president and a lawyer with Peiffer Wolf Carr Kane Conway & Wise in New Orleans.

Some of the lawyers who represent firms in enforcement cases said their clients have avoided the tag. Firms received letters in the late summer and fall of 2022 from Finra offering them a “one-time” opportunity to terminate within 30 days brokers with red-pock-marked BrokerCheck records in order to reduce their risks of being designated as restricted.

“I do not have or know of any [broker-dealer] clients who have had to deal with the restricted label,” said Gregg Breibart, a partner at Kaufman Dolowich in Fort Lauderdale. “Most of my clients have done everything in their power to avoid even getting close to the line under that rule.”

Under Rule 4111, Finra said it would conduct an annual analysis of each of its member firms to determine which, based on their and their brokers’ disciplinary records, should be required to have the segregated accounts to cover unpaid arbitration awards and comply with the other restrictions.

Following its second annual evaluation last year, Finra has another scheduled for June 1 this year to determine which firms qualify as restricted, according to its website.

Finra has not disclosed a threshold for qualifying as restricted but said in its 2019 rule proposal that it identified 20 small firms that had 30 or more disclosure events over the prior five years, ten mid-size firms with 45 such disclosures in the same period and five large firms with 750 or more disclosure events.

Rule 4111 was supposed to follow the same preemptive regulatory approach as Finra’s Rule 3170, which is commonly referred as the taping rule and requires firms that employ a large number of brokers from expelled firms to record all phone conversations with customers. Rule 3710 followed a Wall Street Journal report that over 5,000 brokers from expelled firms continued to operate and often had higher rates of customer complaints.

SLCG’s data analysis found only two broker-dealers identified by Finra on BrokerCheck as taping firms.

Bournehill Investment Services in Uniondale, New York, and Joseph Stone Capital in Garden City, New York, both have affixed to the the top of their BrokerCheck record pages: “This firm is subject to FINRA Rule 3170 (Taping Rule).”

As with the restricted tag, Finra does not provide a list of “taping” firms, the spokesperson said. Investors instead must search by the firm’s name on BrokerCheck when evaluating a prospective broker’s employer.

Advocates for DOL Fiduciary Proposal Say Existing Insurance Regulations Fall Short, by Paul Mulholland

Tiffany Zachary — Tue, 19 Mar 2024 14:57:26 +0000

Advocates for DOL Fiduciary Proposal Say Existing Insurance Regulations Fall Short, by Paul Mulholland Tiffany Zachary Tue, 03/19/2024 - 9:57am

PLANSPONSOR (March 19, 2024) By Paul Mulholland

The proposal would add a private right of action and tighter conflict of interest rules.

Consumer advocates have argued that the Department of Labor’s retirement security proposal, sometimes called the fiduciary proposal, is a much-needed change to protect retirees, while opponents of the proposal argue that existing regulation of annuity markets is adequate and the proposal would only reduce lower-income workers’ access to annuity markets.

The fiduciary proposal would assign fiduciary status under the Employee Retirement Income Security Act to those advising on various one-time transactions, including annuity sales. The DOL’s final rule was sent to the Office of Information and Regulatory Affairs, a division of the Office of Management and Budget, on March 8 for a review that typically takes about 60 days. The final rule will likely be published sometime in May.

But opponents of the proposal would prefer continued reliance on the National Association of Insurance Commissioners’ Model Regulation 275, which has been adopted (with no or minimal modifications) by more than 40 states and which mandates a best-interest standard of care for annuity customers.

The Model Reg says: “An insurer may not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives based on the consumer’s consumer profile information.”

The main criticisms of the NAIC Model Reg, in comparison to the DOL’s proposal, are that the model regulation does not consider compensation to be a source of conflicts of interest, it has poor disclosure requirements and it does not permit a private right to sue for damages.

Private Right of Action

The NAIC Model Reg does not allow for affected consumers to bring a civil suit against insurance agents, mandating that enforcement actions can only be taken by a state government agency. It states, “Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation or to subject a producer to civil liability under the best interest standard of care.”

Joe Peiffer, the president of the Public Investors Advocate Bar Association and a supporter of the DOL proposal, says not having a right to sue an insurance agent for selling a subpar product is unacceptable, because it means retirees cannot recover their lost savings directly. Instead, “the under-funded, industry-captured state insurance commissioners can do so. It is further proof that the NAIC standard, written by and for the insurance industry, is toothless.”

Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute and an opponent of the proposal, says a private right of action “changes the entire economics of your business,” because an insurer would need to pay higher insurance rates to protect against lawsuits and maintain other expensive compliance practices, such as more thorough documentation. As a result, that insurer would need to charge higher fees, pricing out smaller savers.

Berkowitz says critics of the NAIC Model Reg should instead encourage insurance commissioners to improve their enforcement practices.

Conflicts of Interest

Supporters of the DOL’s fiduciary proposal frequently point to the NAIC’s Model Reg’s discussion of conflicts, specifically the section that reads, “‘Material conflict of interest’ does not include cash compensation or non-cash compensation.”

Peiffer says excluding compensation as a source of conflicts is “excluding the very biggest thing.” By excluding compensation, insurers need not account for products with different commission levels, and this can incentivize salespeople to sell products that pay them more and not inform the customer of cheaper products that may have been a better fit.

David Certner, legislative counsel and policy director for AARP, says differential compensation between annuity products, as well as the fact that a salesperson may not get paid at all if they do not complete a sale, can incentivize them to recommend an annuity when a customer would have been better off leaving their money in their retirement plan. He says compensation models are “probably the main source of conflicts,” but the Model Reg does not consider them as such.

Certner adds that insurance salespeople can be incentivized to funnel clients to higher-cost annuities to improve their compensation. He says the “largest level of opposition is coming out of the insurance industry,” and this is because “they aren’t meeting a best interest standard.”

Berkowitz answers that though this part of the Model Reg could use “more precise drafting,” all it is really saying is the “simple fact that someone receives compensation does not mean in itself that there is a conflict of interest.” In other words, an insurance salesperson need not work for free in order to avoid a conflict.

Berkowitz also notes that the Model Reg bans sales quotas and contests within a limited time period. The Model Reg reads, “The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.”

Lastly, Berkowitz says that selling an inferior product because it provides a higher commission would violate the Model Reg by placing the agent’s interest ahead of the customer.

Disclosures

Peiffer says many annuity customers don’t fully understand the nature of the product they are buying or how insurance agents are compensated. He argues that insurance agents will often present themselves as acting in a fiduciary capacity, but revert to being mere salesmen when held to account.

The Model Reg does require disclosures about “the scope and terms of the relationship with the consumer,” “a description of the sources and types of cash compensation and non-cash compensation to be received by the producer the role of the producer in the transaction,” as well as “a notice of the consumer’s right to request additional information regarding cash compensation.”

It does not, however, contain a requirement to inform a customer of the scenario in which a salesperson might not be compensated at all if no sale is completed, potentially creating a conflict.

Berkowitz says, “I don’t believe that specific nuance is included in the model form,” and the consumer “should ask that question” of their annuity provider.

House Republicans Pass Accredited Investor Bill, Glenn Koch

Ashley Ringo — Mon, 11 Mar 2024 13:22:07 +0000

House Republicans Pass Accredited Investor Bill, Glenn Koch Ashley Ringo Mon, 03/11/2024 - 8:22am

Financial Advisor IQ (March 11, 2024) By Glenn Koch

The Expanding Access to Capital Act of 2023 broadens the definition of an “accredited investor” for the purpose of nonpublic offerings.

The House of Representatives on Friday passed legislation that would expand the definition of an "accredited investor" for the purpose of private equity offerings.

The Expanding Access to Capital Act of 2023 includes a provision that loosens the definition of accredited investor to include any individual receiving individualized investment advice or recommendations from a qualified professional about a nonpublic offering.

Meanwhile, individuals who do not meet income or net-worth thresholds for accredited investors may invest as much as 10% of the greater of their net assets or annual income in nonpublic offerings, per the legislation, H.R. 2799.

The act, introduced by Republican Representative Patrick McHenry of North Carolina's 10th District, is intended to facilitate capital formation by strengthening public markets, helping small businesses and entrepreneurs, and creating new opportunities for all investors, according to a press release issued by McHenry's office.

"This legislation ... will benefit Americans from all walks of life — whether they're saving for retirement or launching a startup," McHenry said in a statement. "I'm proud House Republicans advanced H.R. 2799 to provide more people with the opportunity to achieve their American dream."

The legislation passed the Republican-tilted House along party lines, at 212 to 205, with 15 no-votes. It now advances to the Senate, where, even with full Republican support, it would need votes from at least two Democratic or independent senators to pass.

The House's vote drew criticism from investor advocates, among them Houston-based attorney Sam Edwards, a former president of the Public Investors Advocate Bar Association.

"This is yet another example of Congress, under the guise of 'choice', favoring the interests of Wall Street over Main Street," Edwards told FA-IQ via email.

"The new bill essentially assumes that all financial advisors have the knowledge and capability to appropriately evaluate unregistered securities at the time they are sold and then to continue with that throughout the life of the investments. In truth, very few financial advisors have that knowledge or the resources to be able to do this," added Edwards, of Shepherd Smith Edwards & Kantas.

Earlier last week, in a public letter to several members of Congress, the Americans for Financial Reform Education Fund said the legislation "weakens regulation of both the public markets and the private markets, making it a bad deal for investors of all types, and a boon to issuers interested in raising capital with the lowest possible degree of disclosure, compliance, accountability, and overall economic inefficiency."