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Other Matters That Matter – Part 2

by | Mar 20, 2020

By Mike McWherter, JD / Chief Compliance Office PenChecks Trust®

In this installment of Other Matters That Matter, we’ll take a quick look at two different but very important developments on the regulatory horizon. First, the Department of Labor’s (DOL) proposed rule “Default Electronic Disclosure by Employee Pension Benefit Plans Under ERISA.” Then the Securities Exchange Commission’s (SEC) “Regulation Best Interest” (or “Reg BI” for short) as it applies to Registered Investment Advisors (RIAs).

Default Electronic Disclosure for Retirement Plans

The DOL is moving away from the “continuous access website” approach contained in Field Assistance Bulletin 2006-03. The new rule will utilize a “notice and access” paradigm whereby plan administrators will be able to comply with certain document disclosure obligations by posting them on their website coupled with an electronic notice of availability such as email.

The proposed rule identifies “covered individuals” – participants, beneficiaries and alternate payees – who have provided the plan administrator with an electronic address (email address, smartphone number, or an employer/plan administrator assigned electronic address). Moreover, the electronic address need not be device-dependent. It can be a smartphone, tablet, laptop or desktop – any device with an internet connection. Importantly, the plan administrator must also implement a process that helps ensure the continued accuracy of the electronic address. The message here seems to be: stay in touch!

The proposed rule also defines “covered documents” – any document plan administrators are required to provide to covered individuals. This can include SPDs, SMMs, SARs, Annual Funding Notices, 404a-5 fee disclosures, QDIA notices and benefit statements. The covered document must be provided in a timely manner (when required). It must also be searchable and in a widely-available format such as pdf.

In a nod to data privacy, the proposed rule requires that the website must protect confidential information. For plan sponsors and administrators subject to the requirements of the California Consumer Privacy Act (CCPA) and/or the European Union’s General Data Protection Regulation (GDPR), this will add some additional and important requirements.

SEC Regulation Best Interest (Reg BI)

Reg BI is huge for Broker/Dealers (B/Ds), but it also contains some important caveats for RIAs. Due to the large number of RIAs in the Qualified Retirement Plan space, I’ll focus briefly on some of the impacts for RIAs.

  • Crossover Enforcement. RIAs should maintain a clear separation between their advisory services and other business interests. For example, is the RIA also a “producing TPA”? Does the RIA also have a CPA tax preparation, tax advisory or consultancy business? Consult with your legal counsel on how to properly structure the organization of the various business interests. Be aware that the SEC takes a broad view of the investment advisor’s duty, and applies it to the entire advisor-client relationship, not just the advisory services.
  • No Vague Contracts. RIA service agreements should clearly state the scope of the engagement, the services rendered and the fees charged. Again, your legal counsel can help you properly structure your agreements.
  • No Grace Period. Both Reg BI and Form CRS require compliance effective June 30, 2020. And the Office of Compliance Inspections and Examinations (OCIE) says it will immediately begin enforcing the requirements on that date.

Lastly, a quick comment about Reg BI and robo-advisors. It seems to be generally accepted that robos factored into the SEC’s thinking for Reg BI. So one can ask how will a robo be able to show that it has taken into account all of the relevant factors in providing its advisory service?

I suspect we’ll see a few different approaches; some more contractual, some relying more on additional technology and system attributes, and some both. But the robos may well have an advantage in the long term as younger generations seem to be more comfortable with automated services and the economies of scale that can be achieved with automation.

Please note that there is more to both proposed rules than I have touched on here. If you’re responsible for document disclosures for your or your clients’ retirement plans, I highly recommend reading the proposed rules and comments as well as one or more of the several excellent commentaries published by various ERISA counsel.

Mike joined PenChecks in 2012 and is responsible for managing and overseeing the company-wide compliance function. With more than 30 years of combined legal, financial institution and ERISA plan provider compliance experience, Mike provides guidance and oversight for all compliance matters, supervises regulatory exams and audits, and coordinates between outside counsel, management and the board of directors.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.



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