19 IDEAS FOR LEGISLATION TO PROMOTE RETIREMENT SECURITY
As of Sept. 24, 2020
By Ron A. Rhoades
For more information or to make recommendations,
please contact: firstname.lastname@example.org
Problem: School teachers have horrible 403(b) plans. ERISA does not apply. School districts don’t screen investment providers, for if they do the school district becomes subject to ERISA liability as a plan sponsor. In addition, many public colleges and universities, as well as other state and local governmental plans.
Solution: Authorize school districts and other governmental employers, and churches, to elect to have ERISA apply. But avoid liability by adopting the same relief as provided in the proposal set forth in Section 2, below.
Governmental plans should be required to submit Form 5500 (with modifications, as set forth below), but would be exempt from any audit requirement.
Section 2. Conditional Relief of Small and Large Businesses (and Governmental Entities) from Plan Sponsor Liability Under ERISA.
Problem: We want to encourage employers to offer defined contribution plans. But employers become subject to ERISA liability, as to the investment choices made in the plan. Worse yet, the “retirement plan consultant” and broker or insurance agent who recommends the investment choices is shielded by the low “suitability” standard – and is usually dismissed early on from class action lawsuits brought by employees – leaving the employer holding the bag. Business owners are not investment experts. But someone should be held accountable.
Solution: Have all plan sponsors of defined contribution plans avoid liability for investment recommendations under ERISA – provided they hire a 3(38) investment manager (who would be a fiduciary), and that investment manager has adequate malpractice (E&O, or liability) insurance, including sufficient “tail” coverage, in amount and duration as determined by the DOL.
This proposed change would dramatically alter the liability of plan sponsors, who have paid over $6 billion in settlements from 2006 through 2018 (per NAPA “ERISE Litigation Tab: $6.2 billion.” April 15, 2019). The fact of the matter is that businesses – both large and small – do not possess the expertise to navigate the complexities of ERISA, including its prudent investor rule, given the complexity of the capital markets today and the often-hidden fees and costs embedded in many mutual fund and other investment and insurance products today.
Problem: Many non-fiduciaries provide investment recommendations to ERISA plan sponsors, who are not fiduciaries under the DOL’s five-part test.
Solution: Modify the statute, to make everyone providing investment recommendations to defined contribution accounts and IRA accounts a fiduciary, except those who only describe their investment or insurance products.
However, a limited exclusion would exist for those who sell investment products, either as a product manufacturer (i.e., mutual fund company) or distributor (broker-dealer firm, insurance agent or insurance broker). Why? In the United States we have a very pro-free markets society. There should always be a place for “product sellers” in our capital markets system, in my view. I doubt that we, as a society, are currently willing to impose broad fiduciary duties upon all those who provide investment recommendations. Many current business models would be incompatible with such a universal application of fiduciary standards. It is difficult, if not impossible, to reconcile a product provider’s status as the manufacturer or seller of a product, when also imposing fiduciary duties upon such product provider. The roles are simply incompatible.
Yet, as Alexander Hamilton once wrote, “If all men were angels, no government would be necessary.” Hence, rather than stating that there is no role to play for those who desire to sell products (or provide any information regarding same, either as a product manufacturer or as a product distributor), instead impose requirements for such an exemption that clearly denotes the role of product salespersons and the potential ramifications should a consumer seek to rely upon the “recommendations” provided by such product salespeople:
(A) REQUIREMENTS FOR INVESTMENT / INSURANCE PRODUCT SALES EXEMPTION FOR PROVIDING RECOMMENDATIONS TO PLAN SPONSORS:
(1) Provide a written disclosure, in a form devised by DOL (which disclosure form should be tested to ensure consumer understanding) to the recipient (plan sponsor, plan participant, IRA account owner, etc.) of any investor education or the description of any investment product or strategy, which includes these statements:
(a) I/we are providing only a description of investment and/or insurance products to you, the plan sponsor. We are not recommending these products for inclusion in your retirement plan.
(b) These investment and/or insurance products may or may not meet the requirements of ERISA’s application of the prudent investor rule, the requirements of which include (but are not limited to) broad diversification in investment portfolios and no waste of the assets of the plan participants (as may occur through higher-cost or higher-fee investment or insurance products, when similar lower-cost or lower-fee investment or insurance products are available).
(c) I/we are not acting as in a fiduciary capacity. Rather, our relationship is “arms-length,” as exists between most sellers and purchasers of products. In such situations, “caveat emptor” (i.e., “let the buyer beware) applies, and only limited duties (such as the duty to avoid misrepresentations) apply to me/us as the investment or insurance provider.
(d) I/we will, in all likelihood, not be liable should you (as plan sponsor), nor to the plan or the plan participants (employees, retirees, etc.), should you choose our investment or insurance products – and should you incur liability to plan participants (employees, retirees, etc.) on account of inclusion of these insurance or investment products as part of your retirement plan.
(e) In contrast, if you engage a 3(38) fiduciary under ERISA, which fiduciary meets the requirements of regulations adopted under ERISA providing for relief from liability for plan sponsors for the selection of investment and insurance products for the retirement plan, then your liability as plan sponsor for such selection of investment and insurance products would be limited.
(2) Not utilize the terms “retirement plan” or “401(k)” or “IRA” or “403(b)” or “qualified plan” (or similar terms connoting a retirement plan or other tax-deferred account which is subject to either ERISA or the requirements of the prudent investor rule” in association with the terms “consultant,” “advisor,” “adviser,” “manager,” or other terms.
(3) Not market (as a firm or individual) in any manner to the plan sponsor as a fiduciary, or as a consultant or advisor to plan sponsors or plan participants, or as a manager or designer of prudent portfolios. And also not market in any fashion (as a firm or individual) that the firm or individual acts in the “sole interest” or “best interest” of the plan sponsor or plan participant, or keeps the interest of the plan sponsor or plan participant paramount to those of the firm or individual, or similar phrases that denote or imply that a fiduciary relationship exists (whether or not such terms are authorized or required by any other law or regulation).
(4) Not engage in the ongoing monitoring of investment portfolios, nor their management.
(B) REQUIREMENTS FOR PRODUCT SALES EXEMPTION FROM FIDUCIARY REQUIREMENTS FOR PROVIDERS OF INVESTMENT OR INSURANCE RECOMMENDATIONS TO PLAN PARTICIPANTS, IRA ACCOUNT OWNERS OR BENEFICIARIES, ETC.:
A form, and definitional text, is set forth in Exhibit A to this document. Modification of this form to be specific to investment accounts which are either subject to ERISA or subject to the prudent investor rule (as suggested for IRAs, elsewhere in this document) could be undertaken. However, a broader reform of the regulation of brokers and investment advisers could be considered, and might be more appropriate.
Section 4. Providers of Group Education to Retirement Plan Participants: Hold to Fiduciary Standard.
Problem: Financial planning and investment advice can be cost-effectively delivered to many plan participants via group educational sessions. Yet, there exists an exemption from the application of fiduciary duties to the delivery of investment education.
We should acknowledge that group “educational seminars” and even advice delivered via financial planning software, educational videos, and materials, is still advice – that plan participants rely upon often. It makes sense that education therefore be provided under a fiduciary standard.
Solution: Provide that all education given to plan participants be provided under a fiduciary standard. This includes education on financial planning needs, budgeting, savings, tax consequences of various saving and investment vehicles, asset allocation, the use of target date funds, etc.
As indicated above, a very limited exemption should exist for the delivery of information about specific investment or insurance products by non-fiduciary product manufacturers or sellers. The disclosures set forth above may be appropriately modified for this purpose. However, such non-fiduciary product manufacturers or sellers should not provide educational seminars (and certain other educational videos, materials) to plan participants. Their activities should be much more greatly limited.
Section 5. Application of the Prudent Investor Rule to all Individual Retirement Accounts and all Other Tax-Deferred Investments.
Problem: Individual retirement accounts (including Roth IRAs, SIMPLE IRAs, SEP IRAs) and certain other types of retirement accounts and plans not subject to ERISA (including state-governed defined benefit and defined contribution plans, health savings accounts, Coverdell accounts, and 529 college savings accounts), are not governed by the prudent investor rule.
Yet, substantial economic incentives exist for non-fiduciary providers of investment and insurance products to move assets to accounts not governed by ERISA’s requirements, in order to sell high-cost products. The Internal Revenue Code provides many tax-deferred investment and insurance accounts or products designed for retirement purposes with special tax treatment. In some instances, tax-deferred accounts can become tax-free account vehicles (such as Roth accounts, health savings accounts, 529 college savings accounts), when distributions occur for approved purposes. The major benefits of such favorable tax treatment should not be offset by imprudent investments.
Solution: Apply to all tax-deferred investment and insurance products the prudent investor rule, as it has been interpreted under ERISA. This includes not just IRA accounts, but also non-ERISA qualified retirement plans, as well as nonqualified plans, nonqualified variable annuities, and tax-deferred fixed index annuities and fixed annuities.
Note that doing this would likely remove the concerns about IRA rollovers. IRAs would not be subject to ERISA, but would be subject to the very strong prudent investor rule.
Section 6. Provide for Payment of Financial Planning and Investment Advisory Fees from Retirement Accounts.
Problem: Increasingly individual advice relating to financial planning and investments is provided to plan participants. While some of this advice is provided through educational materials and videos, and other through consumer-accessed and consumer-inputted financial or investment planning software, it is clear that individual advice to plan participants is often highly desired, either at the time of enrollment in the retirement plan, or at the time of retirement, or in between.
Financial planning and investment advice is typically inter-related. For example, advice on budgeting and better decisions on expenditures leads to increased savings (and increased investments, often). Decisions as to whether to utilize extra funds to pay down debt, versus establish a cash reserve, or fund a health savings account (instead of additional contributions to a defined contribution account) are also important pre-conditions to the delivery of investment advice. Establishing lifetime goals leads to determination of how much to save and invest to achieve those goals. In contrast, some aspects of financial planning – such as estate planning recommendations relating to the making of a will or living trust – bear lesser relationship to the delivery of investment advice. (Although, arguably, the decision to spend money on obtaining an estate plan from an attorney, is a decision relating to finances and investments).
Many retirement plan accounts do not currently permit the deduction of investment advisory fees for individual (one-on-one) investment and financial advice. Many plan participants (even higher-income individuals and couples) do not possess significant cash or other holdings in non-taxable accounts to pay for investment and financial planning advice.
The value of good financial planning and investment advice can be extraordinary, in terms of assisting individuals to attain their lifetime goals, if it is done by those qualified to do so, and if the fees for such are reasonable.
Solution: Expressly provide that all plan sponsors shall provide for the payment of investment advisory and financial planning advice from qualified retirement accounts, and from IRA accounts, without such payment being treated as a taxable distribution, provided:
(1) The provider of the investment and/or financial planning advice is a fiduciary to the client, extending to all aspects of the fiduciary-client business relationship;
(2) The fees paid may be a flat amount (paid in annual, quarterly, or monthly, or upon completion of a financial plan or financial planning activity), or an hourly fee.
(3) The fees paid are reasonable for the services provided.
Note that I do not suggest that “assets under management” or “assets under advisement” fees be authorized. These fees can become unreasonable in amount, in many instances, given that the amount of services does not increase at the same rate as the fees increase, even with tiered levels, in many investment adviser fee schedules. In addition, percentage fees can easily be converted into flat monthly, quarterly or annual fees, which are better understood by consumers. (Commissions and 12b-1 fees can also easily be converted into flat fees, and paid by the client directly; but this is a subject for another time.)
For example, a 1% annual fee on a $25,000 account could easily be transformed by a fiduciary advisor into a flat fee ($250), or even a fee per month ($20.83 per month).
A question arises as to how much a burden this would place upon plan sponsors or third-party administrators. I suggest, instead, that the burden of distributing fees be imposed upon the custodian, directly. Essentially, any plan participant could submit a form (online, in all likelihood) to the custodian that authorizes payment of a flat amount, or a recurring flat amount (per month or quarter). (Whether recordkeepers be involved in this process, as recordkeepers typically possess the online interface to the accounts, could be considered, instead.) A small fee for each distribution (or series of distributions) for payment of fees, to the custodian and/or recordkeeper, could be instituted to offset any additional costs incurred. In my view, fees for personalized investment and financial advice, nor any additional costs relating to payment of such fees, should not be spread out among all plan participants.)
Problem #1: These exists inadequate disclosure of the investments in many qualified investment plans. The short-form Form 5500 should include such disclosures. Providing this information would alert the Department, as well as advocates for plan participants, to the presence of investment or insurance products that may not meet ERISA’s requirements, including the requirements of the prudent investor rule.
Solution: The DOL shall include in all Form 5500s required to be filed, the requirement to provide a list of the name of each investment option in the plan, its ticker symbol (if applicable), and the amount of assets held in such investment option. For any investment or insurance product that does not possess a ticker symbol, a link shall be provided, by the product provider, to a non-secured web site in which is set forth adequate information regarding the product as the DOL may require by rule.
At the same time, Form 5500 (in all of its versions) should also be reviewed to ascertain if there are certain sections that don’t lead to meaningful disclosures – i.e., the cost of completion of the section is not justified by the benefits (in the form of corrective actions that could be identified by the DOL, during reviews, etc.).
Problem #2: The annual audit requirement imposes a substantial cost upon providers of many smaller plans. This deters the formation and maintenance of retirement plans by some plan sponsors. The question exists as to whether the annual audit requirement provides sufficient benefits, to plan participants, to justify such costs for smaller plan sponsors.
Solution: Raise the amount of plan assets necessary to trigger the annual audit requirement to a much larger amount. Also, require the DOL to study the benefits of each activity and/or report (or section thereof) undertaken as part of the annual independent audit, to determine if the scope of the annual audit can be diminished, as a means of potentially lowering the cost of annual audits.
Problem: PBGC Solvency Concerns.
As stated in the DOL’s “2020 Major Savings and Reforms” section of its PBGC FY 2020 report: “The multiemployer program covers over 10 million participants and is in dire financial condition. The 2018 multiemployer program deficit was $54 billion, with only $2 billion in assets and $56 billion in liabilities. PBGC projects the multiemployer program will be insolvent by the end of 2025, at which point participants in insolvent plans would see their guaranteed benefits cut by as much as 90 percent. Multiemployer premiums are very low—a flat rate of just $29 per participant in 2019.”
Per an article in CFO.com, “According to a Willis Towers Watson study of defined benefit pension plans sponsored by 376 U.S.-based Fortune 1000 companies, their aggregate funded status barely inched up last year, reaching an estimated 87%. That was only a single percentage point higher than the funded status level at the end of 2018. The analysis found that those sponsors’ collective pension deficit was estimated to be $216 billion at the end of 2019, slightly lower than the $222 billion deficit a year earlier.”
Yet, many multi-employer plans are likely to go bankrupt within the next five years, according to news reports. From the CFO.com January 2020 article: “‘If we unexpectedly enter another recession, and the five-year Treasury is trading at 1%, and equities give up part of their recent gains, that’s a really painful scenario for pensions,’ Bob Browne, chief investment officer at Northern Trust [stated] in mid-2019.”
The risk to the PBGC deficit is huge, yet action is not being taken. Some observers are suggesting that Congress bail out the PBGC – which of course shifts burdens away from corporations and onto taxpayers.
The better solution is to attack the problem itself – the underfunding of pension (defined benefit) plans by corporations, large and small. The PBGC should be viewed as an extreme savior of last resort, rather than a savior.
Solution: “No corporation shall pay dividends to its shareholders, nor engage in stock buybacks, when its defined benefit plans possess a funding level which is below 90% of the desired funding level, as determined by appropriate actuarial analyses.”
Note that the standard of 80% target for funding, implemented by the Pension Protection Act of 2006, should not be acceptable, for a plan to be “actuarially sound.” For large multi-employer plans, this could easily result in billions and billions of unfunded liabilities.
Related Problem: The “valuation interest rate” used by actuaries fails to adequately consider the future expected returns of various asset classes. Currently, many actuaries are projecting returns for U.S. stocks of 5% to 10% over the next 10 years, and projecting long-term U.S. Treasury bond returns at 2%, while many investment analysts project U.S. stock returns to be in the low single digits and long-term U.S. Treasury bonds returns to be negative over the same time period.
The underfunding amount for both public and private pension plans should not be substantially affected by short-term fluctuations in the values of asset classes. For example, if the stock holdings of a plan fall in value over the course of a year, such as by 20%, then the expected return of stocks (assuming mean reversion) should increase, so that any impact upon the plan and its funding ratios is minor. (Changes in the macroeconomic environment do, however, affect projected rates of returns, over the long term; but this is different than changes in asset class valuations, which are often – but not always – disconnected from macroeconomic events.)
While there can be a wide variance of the estimates of future returns of various asset classes, it is becoming more accepted in finance that reversion to the mean of asset class valuations is more likely to be achieved over a 17-year time frame.
Solution: GAAP accounting standards might be directed to better consider 17-year mean reversions in asset class valuations, whenever the valuation interest rate is calculated, as a factor in determining near-term investment asset class returns for purpose of undertaking the “valuation interest rate.”
Problem: Different rules exist for how much can be contributed to defined contribution plans, especially when the employee has two jobs, has a spouse who is working, etc. These rules are extraordinarly complex, and often lack logic.
Solution: The maximum contribution, by both employer and employee, to all defined contribution plans in which the employee participates, is $25,000 per year, such sum to be adjusted for inflation using the measure of CPI-U, in $1,000 increments, each year.
[There can be discussions about the deferral amount: is it too large, or too small? What is the effect of establishing different maximum funding levels on the national budget, and on state budgets?]
Section 10. Too Much Funding of Cash Balance and Certain Other Pension Plans (By Owners of Small Companies / Firms).
Problem: Imagine electing to defer, in a qualified retirement plan, over $200,000 a year. Yet, that is what happens in some small businesses, where the owner is older and employees are generally younger, using a 401(k) paired with a cash balance plan. While technically a defined benefit plan, the contributed amounts are held in separate accounts – like a defined contribution plan. The ability to do this could be viewed as abusive and/or unfair to many individual taxpayers who don’t possess the ability to do this.
Solution: Provide that the maximum contribution to any separately maintained defined benefit plan account must fit with the annual limit to defined contribution plans, with the new combined limits suggested previously applied.
Section 11. Repeal Tax Provisions Authorizing Nonqualified Retirement Plans – Which Only Benefit the Highly Compensated.
Problems: Executives often defer hundreds of thousands of dollars of their salaries by means of nonqualified retirement plans. The result is often the lowering of income tax burdens, to retirement years (when earned compensation is lower), resulting in some of the compensation being taxed for federal income tax purposes at very low tax rates. Additionally, for nonqualified retirement plans paid out over 10 years, the executive can avoid state income tax by moving to a state with a lower marginal state income tax rate (or none at all, such as in the case of Florida, Texas, Tennessee, etc.). Is this fair to rank-and-file employees, who don’t have access to such nonqualified retirement plans? Is it fair to the budgets of federal and state governments?
Solution: Prohibit nonqualified retirement plans in which tax deferral occurs.
Section 12. Simplification and Consolidation of Defined Contribution Plans and Individual Retirement Accounts: Establish a Universal “New Retirement Account” (NERA) for Employers and Employees.
Problem: We have a dizzying array of defined contribution plans, each with their own set of rules for qualification, contributions, distributions, and plan maintenance. See, for example, https://www.rbcwm-usa.com/resources/file-687843.pdffor just some of the plans. Large costs are paid to establish and maintain these plans. Experts exist (and are well-paid) to determine for many employers the best type of plan or combination of plans, which features to utilize, etc. Third-party administrators are engaged to file annual plan amendments.
Solution: Provide for all defined contribution plans and IRAs to become one: “New Retirement Account” (NERA), possibly with a Roth option. DOL could provide a model form for plan adoption, similar to Form 5305-SIMPLE, but with the following provisions and options:
· Employers may match any percentage of an employee’s contributions. Employer may increase or decrease the amount of the employer’s contributions at any time, with notice to employees.
· Employers may undertake contributions without a match.
· Employees may undertake contributions without a match.
· The maximum contribution, by both employer and employee, to all defined contribution plans in which the employee participates, is $25,000 per year, such sum to be adjusted for inflation using the measure of CPI-U, in $1,000 increments, each year.
· The contribution limit described above could be made either to traditional or Roth accounts, without limitation (assuming Roth accounts are continued; see discussion elsewhere).
· Auto-enrollment occurs (opt out by new employees is provided).
· Auto-escalation is required (unless opted out by the employee, at any time).
· All employer contributions vest immediately. (No more vesting schedules, to reflect the increased mobility of employees in our society.)
· Loans from plans could be undertaken, but only twice a year, and only for purposes of financial hardship. A certification form delivered to the custodian would be all that is required to secure the loan. All loans would be required to be repaid, with 5% set interest, within five years.
· Early distribution provisions would be uniform (as suggested elsewhere).
· Distributions for early retirement could be taken, at any time, in the annual amount of 4% of the previous Dec. 31stplan balance, without penalty. However, any person with earned income in excess of $40,000 per year (or $80,000 per married couple, filing jointly) would be prohibited from taking early distributions. (Such assumes to be adjusted annually for inflation.)
· The penalty for not taking a required distribution (age 72 or later) would be reduced from 50% to 20% of the amount of the tax liability.
· Nondeductible contributions would be prohibited (except to Roth IRA accounts).
These and other options could be set forth in an online form for the registration of all NERA accounts (and/or plans). The generation of a “summary plan description” as a result of the options chosen could then automatically occur, along with any required notices to employees.
In addition, legislation should increase the portability of such accounts. There would be no need to rollover upon separation from employment; just disconnect the account from the employer’s system and keep at the same custodian.
Rollovers from 401(k) and 403(b) plans into IRA accounts are often delayed by weeks or months, as various parties (employers, TPAs, recordkeepers) coordinate their efforts. Often funds held in a plan are liquidated, and a check sent to the employee. This creates tax burdens in some instances, and increases the likelihood of non-rollover of plan balances. It may also result in the plan participant being “out of the market” for a period of time, thereby incurring the investment risk of such. All of these problems would be solved by simplification.
Legislation could provide for an effective date, perhaps with a series of dates for various plan sponsors to terminate existing plans, establish the new NERA plan and accounts, and undertake transfers. For example, some employers may have a Jan. 1st date, others a Feb. 1st date, etc. This would reduce the burdens on those providing advice and services relating to such plan terminations, etc.
Tax reporting could be modified to list contributions to retirement plans as an above-the-line deduction, consistently, rather than as an exclusion from income. This would make it easier to determine, when filing tax returns, if the contribution limits for any taxpayer have been breached. (In the event of breach, removal of the excess contributed amounts, along with any pro rata gain, should be permitted to occur within a reasonable time.)
Note that this standard form for the “NERA” and the resulting simplification for the establishment and maintenance of plan documentation would greatly simplify the administration of many defined contribution plans. No longer would there be a need for a third-party administrator. And no longer would there be a need for tax credits to small businesses to assist with paying the costs of such a plan (the maximum tax credit is now $5,000, each year, for up to 3 years).
Section 13. Simplification of Required Minimum Distribution Rules for Qualified Retirement Accounts, IRAs, and NERAs – and Longer Tax Deferral to Reflect Increases in Longevity
Problem: Despite recent legislative reforms and proposed IRS regulations, required minimum distribution rules remain complex, and the current uniform table forces very large distributions commencing when a person is in their late 80’s – often causing a much higher rate of tax. Additionally, people are destined to live much longer. It is quite possible that tens of millions of Americans will soon live to age 100 or beyond, and advances in aging research may well result in many individuals living significantly longer.
Also, most individuals desire to pass along their “nest egg” to their heirs. Under recently adopted reforms, inherited IRAs and retirement account balances must be distributed within 10 years by the account beneficiary (with certain exceptions for minors, special needs beneficiaries, etc.).
Solution: Provide for required minimum distributions of 4% of the prior 12/31 balance commencing at age 72, and for each year thereafter. This would increase the amount of the distribution for those in their early seventies, but decrease the amount of the distribution for older beneficiaries. There would be less risk of “running out of money” before “running out of time.”
Section 14. Make Uniform the Rules for Early Distributions from All Qualified Retirement Plans and IRAs.
Problem: Different exceptions exist for different types of defined contribution accounts, as to avoiding penalties. As a result, different types of employees are treated differently (unfairly), and “tax traps” (such as the SIMPLE IRA 2-year from start of participation penalty for rollovers) exist for the unwary.
Solution: Simplify and make uniform the early withdrawal rules, for all defined contribution and IRA accounts.
Problem: The SEC generally takes the view that the fiduciary duties of investment advisers are limited, as they are only “implied” from the Advisers Act. In addition, we have seen that the SEC has emphasized disclosures of conflicts of interest, rather than their avoidance.
In any future legislation, under ERISA or more broadly, the broad fiduciary duties of due care, loyalty, and utmost good faith could be more expressly set forth.
a) (Delineation of the Duties of Fiduciaries When Investment Advice is Provided.) When a fiduciary standard of conduct applies, such investment advice shall be provided in the best interests of the client, observing the fiduciary duties owed to the client by such broker-dealer, agent, or adviser acting in such fiduciary capacity. The fiduciary duties possessed by such fiduciary in connection with the provision of such investment advice include, but are not limited to:
i. Duty of due care. The fiduciary must provide advice that reflects the due care, skill, prudent and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, risk capacity, need to take on risk, financial circumstances, and other needs of the client. In connection therewith:
a. Where ongoing monitoring of the client’s investment portfolio (or any portion thereof) is to be provided, there exists the duty to provide advice and monitoring over the course of the relationship.
b. The duty of due care includes a duty to make a reasonable inquiry into a client’s financial situation, level of financial sophistication, investment experience, and investment objectives (which is referred to collectively as the client’s “investment profile”) and a duty to provide personalized advice that is suitable for and in the best interest of the client based on the client’s investment profile. The nature and extent of the inquiry by the fiduciary turn on what is reasonable under the circumstances, including the nature and extent of the agreed-upon advisory services, the nature and complexity of the anticipated investment advice, and the investment profile of the client. The fiduciary must update a client’s investment portfolio periodically in order to adjust the fiduciary’s advice to reflect any changed circumstances. The frequency with which the adviser must update the information in order to consider changes to any advice the adviser provides would turn on many factors, including whether the adviser is aware of events that have occurred that could render inaccurate or incomplete the investment profile on which it currently bases its advice. For example, a change in the relevant tax law or knowledge that the client has retired or experienced a change in marital status might trigger an obligation to make a new inquiry.
c. The cost (including fees and compensation) associated with investment advice and the recommended investments would generally be one of many important factors – such as the investment product’s or strategy’s investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility and likely performance in a variety of market and economic conditions – to consider when determining whether a security or investment strategy involving a security or securities is in the best interest of the client. Accordingly, the fiduciary duty does not necessarily require an adviser to recommend the lowest cost investment product or strategy. However, a recommended security is in the best interest of a client if it is higher cost than a security that is otherwise nearly identical or substantially similar. Given the substantial academic evidence supporting the proposition that higher-cost investment products on average provide lower returns than similar low-cost investment products, an examination of the fees and costs of the investment product is likely to be a primary consideration. However, a fiduciary would not satisfy its fiduciary duty to provide advice with due care by simply advising its client to invest in the least expensive product or strategy without any further analysis of other factors in the context of the client’s investment portfolio and the client’s investment profile.
d. The fiduciary must conduct a reasonable investigation into the investment strategy and financial product that is sufficient to ensure that the fiduciary not base the advice on materially inaccurate or incomplete information.
e. The fiduciary possesses a duty to seek best execution.
f. In assessing the due care undertaken by the fiduciary, the fiduciary shall be judged as an expert in the provision of investment advice, as the standard of due care is relational. While not conclusive, industry association standards are often highly probative when further defining the standard of care.
ii. Duty of loyalty. The fiduciary provides investment advice that is in the best interests of the client, and such advice is without regard to the financial or other interests of the broker-dealer, agent, adviser, or their affiliated entities. In connection therewith:
(a) The fiduciary cannot favor its own interests over those of a client, whether by favoring its own accounts or by favoring certain client accounts that pay higher fee rates to the adviser over other client accounts.
(b) The fiduciary must reasonably seek to avoid conflicts of interest with its clients. The fiduciary owes the obligation to the client to not be in a position where there is a substantial possibility of conflict between self-interest and duty. The fiduciary duty of loyalty requires the fiduciary to adopt the client’s goals, objectives, or ends.
(c) However, not all conflicts of interest can reasonably be avoided, and whenever a material conflict of interest exists the fiduciary shall comply with all of the following requirements:
i. The fiduciary shall affirmatively disclose to the client the conflict of interest, all material facts relating thereto, and the ramifications of the conflict of interest for the client.
1. A fact is considered material if there is a substantial likelihood that a reasonable investor would consider the information to be important in making an investment decision
2. The disclosure must be timely; it must be provided prior to the completion of the transaction that is contemplated.
3. The disclosure must be undertaken affirmatively to the client. Access to the disclosure by the client, alone and without more, is not affirmatively undertaken disclosure. The fiduciary must ensure that the disclosure is received and reviewed by the client.
4. The disclosure must be sufficient for the client to be clearly advised and obtain full understanding of the conflict.
5. The disclosure must be frank, full and forthright. The disclosure must lay bare the truth, without ambiguity or reservation, in all its stark significance.
ii. The fiduciary must ensure that the client achieves an understanding of the conflict of interest, the material facts relating thereto, and the ramifications of the conflict of interest to the client.
iii. The client must provide informed consent. Mere consent to a breach of fiduciary obligation does not suffice. Mere consent does not permit the fiduciary to avail themselves of the defenses of estoppel and waiver in an action involving breach of a fiduciary obligation, due both to public policy considerations (the foremost objective of securities laws being to protect investors). The client’s consent must be intelligent, independent and informed. It shall be presumed that no client would ever consent to be harmed, nor would any client undertake gratuitous transfers to his or her fiduciary.
iv. Additionally, the transaction proposed to the client must be, and must remain, substantively fair to the client.
v. The transaction is exempt from the prohibited transaction rules found under ERISA, when ERISA applies.
iii. Duty of utmost good faith. The fiduciary must exercise the utmost good faith in the fiduciary’s dealings with the client. This requires the fiduciary to act with the highest degree of honesty and candor toward the client, and to not act recklessly.
iv. Duty to receive only reasonable compensation. The recommended course of action or transaction will not cause the broker-dealer, agent, or adviser to receive, either directly or indirectly (including but not limited to receipt of compensation by affiliated entities), to receive compensation which is in excess of reasonable compensation.
v. Duty to not undertake any misleading statements. Any statements or other communications made to the client (including prior to the time of entry into the fiduciary-client relationship) regarding any recommended transactions, investment strategies, financial products, fees and compensation received by the fiduciary, material conflicts of interest, and any other matter relevant and material to the client’s investment decisions, will not be materially misleading at the time such statements are made.
Problem: Fixed annuities, including but not limited to fixed indexed annuities, are used as investments. They should be regulated by the SEC, and subjected to similar disclosure regimes. This would not apply to annuities where full annuitization, over a term of years or life expectancy(ies), or some combination thereof, has occurred.
Solution: Redefine “security” accordingly.
Problem: The decision to annuitize a portion of a retiree’s nest egg is a very complicated, and very impactful, decision. A wide variety of alternatives exist, as to the method of annuitization. For example, should an inflation rider (of which there are many types) be sought? Should annuitization occur in stages? Should a delayed annuitization method be chosen?
The financial strength of the insurance company, and the existence of state guaranty programs (and concerns about their lack of funding, should a substantial adverse economic event occur), the health of the retiree (and spouse), the future returns of various asset classes, the current interest rate environment, and much more come into play. In addition, great value can be achieved by shopping annuities in the marketplace, rather than relying upon one annuity provider selected months, or years, earlier by the plan sponsor.
While annuitization of a portion of a person’s nest egg possesses benefits, in terms of managing longevity risk, newer research indicates that the benefits of annuitization may not be as great as suggested by some academic research (some of which research has been funded by insurance companies).
While education about annuitization should be undertaken of retirees, including projected internal rates of returns (if certain ages are achieved), it is best that such education be provided by a person held to an expert standard of care, and who possesses a fiduciary duty of loyalty to the client.
Solution: Remove the ability to annuitize from within a qualified retirement plan. Provide, instead, education about the decision, to retirees, by the providers of education and advice to plan participants. Require, for the annuitization of tax-deferred investment accounts, that the annuitant receive fiduciary advice prior to proceeding with such annuitization.
Section 18. Classification of cash value life insurance as security; prohibition of marketing and sale of cash value life insurance as a retirement savings vehicle.
Problem: Likewise, cash value life insurance is sold as a form of investment. More problematic is the fact that, despite the mid-1990’s scandals regarding the sale of cash value life insurance to teachers as a retirement savings vehicle, this still occurs – a lot!
Solution: Redefine “security” to include all forms of cash value life insurance.
Alternative Solution: Prohibit the marketing and sale of cash value life insurance for purposes of providing future retirement savings.
Problem: Insurance agents push cash value life insurance (which is extra-ordinarily expensive, in terms of its fees and costs) as a “retirement savings vehicles” to unsuspecting teachers, and many more. They promote the ability to withdraw contributions to the life insurance policy (i.e., the cost basis) “tax-free” during retirement, and promote loans from the policy thereafter. A huge “tax trap” comes into play here … cash value policies often “implode” and cause a huge tax burden when they lapse.
Solution: Solve this abuse by changing the tax rules. Any withdrawal from a cash value policy carries out gains (taxed as ordinary income) first. This includes loans taking out against policy values.
EXHIBIT A: DISCLOSURE OF TYPE OF ADVICE PROVIDED AND RESTRICTIONS THEREON.
Various aspects of this proposal may be more applicable to broad reforms of the regulation of providers of investment and financial advice. However, a narrower application of these concepts, and/or disclosure forms, to tax-deferred (retirement) accounts might be considered.
Problem: Many firms have restrictions upon the advice that they provide – such as restricting themselves to certain products, or the use of proprietary funds.
Solution: Adopt an investor protection regime similar to MiFID II’s protections, in which disclosure is made to investors as to whether the advice is “independent” or “non-independent,” and whether the advice is “restricted” (or “no advice” provided). Provide for a disclosure form, such as that set forth on the following pages, to be provided to all investors, once a year, or at the time of any transaction (and before the transaction is finalized).
Disclosure of application of prudent investor rule to investor’s portfolio.
Problem: Many, many investors believe their investment portfolio is managed “prudently” – when in fact such is not the case. Requiring an investment adviser to have a “reasonable basis” for investment advice – the standard under the Advisers Act – seems to be too lax a standard for the management of investment portfolios which consist of tax-favored accounts. Of course, Reg BI (and FINRA’s suitability standard) are also lacking, in terms of the standard of care.
Solution: Require a disclosure. See pages following. This does not negate the application of the prudent investor rule to tax-deferred accounts, however, as suggested previously.
Disclosure of receipt of third-party compensation.
Problem: Nearly a third of the investors surveyed in the Rand 2008 report believed they did not pay their broker or investment adviser anything! Investors should know the sources of third-party compensation, even in a broker-customer (non-fiduciary) relationship.
Solution: Provide for a uniform disclosure form. See attached pages.
PROPOSED STATUTE OR RULE.
Disclosure of “independent advice” or “restricted advice” or “no advice” status and receipt of additional forms of compensation
a) All broker-dealers, agents, and advisers must disclose to each client, prior to the provision of investment advice and during each calendar year thereafter in which the client receives products and/or services from such broker-dealers, agents, or advisor:
1) whether its communications to the client will be:
i. “independent advice”; or
ii. “restricted advice” (also called “non-independent advice”); or
iii. “no advice” (i.e., no investment advice provided;
2) whether the advice will be based on a broad or more restricted analysis of different types of relevant products; and
3) where the advice will be restricted advice, whether the range will be limited to relevant products issued or provided by entities having close links with the firm or any other legal or economic relationships, such as contractual relationships, so as to present a risk of impairing the independent basis of the advice provided.
b) Should a client receiving “restricted” or “non-independent advice” with respect to any investment strategy or financial product, or should a client receive “no advice” with respect to any account or investment strategy or financial product, then the broker-dealer, agent or adviser may not utilize the terms “independent adviser” and “independent advice.” Such terms are restricted to the circumstance when the entirety of the relationship between the broker, agent or investment adviser and the client meets the requirements for the delivery of independent advice.
c) “Independent adviser” and “independent advice”
1) If a broker-dealer, agent, or adviser informs a client that it provides independent advice or that it, she, or he is an independent adviser, then that broker-dealer, agent, or adviser must assess a sufficient range of relevant investment strategies and financial products available on the market which must:
i. be sufficiently diverse with regard to their:
A. type; and
B. issuers or product providers,
to ensure that the client’s investment objectives can be appropriately met; and
ii. not be limited to relevant financial products issued or provided by:
1. the broker-dealer, agent or adviser itself, himself, or herself, or by affiliated entities; or
2. other entities with which the broker-dealer, agent or adviser has such close legal or economic relationships, including contractual relationships, as to present a risk of impairing the independent basis of the advice provided.
2) Examples of arrangements which would result in an inability to provide independent advice.
i. For example, and not by way of limitation, a broker-dealer, agent, or investment adviser which is subject to any form of agreement with an issuer or provider of relevant financial products that would confine the broker-dealer, agent, or investment adviser, or which would incentivize the broker-dealer, agent or investment adviser to select relevant financial products issued or provided by such issuer or provider, will not be in a position to provide independent advice.
ii. For example, and not by way of limitation, a broker-dealer, agent, or investment adviser that holds itself, herself, or himself out as providing independent advice and which utilizes a single platform service to facilitate the majority of its recommendations to clients must ensure that the selection of financial products made available by the platform service provider is sufficiently broad and diverse, including the provision of low-fee and low-cost products, to enable the firm to satisfy all of the requirements of this Rule _____________.
3) A broker-dealer, agent or adviser that holds itself, herself, or himself out as providing independent advice may provide broad and general advice and/or specialist and specific advice.
4) A broker-dealer, agent, or adviser that provides investment advice which is independent advice, but where the broker-dealer, agent or adviser focuses on certain categories or a specified range of investment strategies and/or financial instruments, shall comply with the following requirements:
i. the broker-dealer, agent or adviser shall market and promote itself in a way that is intended only to attract clients with a preference for those categories or range of financial strategies and/or instruments;
ii. the broker-dealer, agent or adviser shall require clients to indicate that they are only interested in investing in the specified category or range of financial strategies and/or instruments; and
iii. prior to the provision of the service, the broker-dealer, agent or adviser shall ensure that its service is appropriate for each new client on the basis that its business model matches the client’s needs and objectives, and the range of financial services and financial instruments that are appropriate for the client. Where this is not the case the broker-dealer, agent or adviser shall not provide such a service to the client.
5) An independent adviser shall define and implement a process to assess and compare:
i. A broad and sufficient range of investment strategies that may be utilized in client’s investment portfolios;
ii. A broad and sufficient range of financial instruments (including but not limited to securities, other investments such as certificates of deposit or other banking products, and annuity and insurance products) that are available on the market; and
iii. The financial circumstances, needs and goals of the client, including but not limited to the client’s investment time horizon, to ensure that the investment strategies and financial instruments utilized appropriately match such client’s financial circumstances, needs and goals.
6) In undertaking a selection process to identify, assess and compare a broad and sufficient range of investment strategies, and where the investment strategy is designed to be in accord with the requirements of the prudent investor rule, an independent adviser’s selection process shall include (but is not necessarily limited to) one or more of following elements with respect to each investment strategy considered:
i. a sufficient review of relevant academic research pertaining to such investment strategy to ascertain if the investment strategy is generally accepted in the academic community;
ii. testing of the investment strategy against historical data; and/or
iii. otherwise subjecting the investment strategy to a robust and comprehensive analysis.
7) In undertaking a selection process to identify, assess and compare a broad and sufficient range of financial instruments, an independent adviser’s selection process must be in a position to advise on all types of relevant financial instruments within the scope of the market on which the independent adviser provides advice, and such selection process shall include (but is not necessarily limited to) the following elements:
i. the number and variety of financial instruments is proportionate to the scope of investment advice services offered by the independent adviser;
ii. the number and variety of financial instruments considered is adequately representative of financial instruments available in the market;
iii. the financial instruments considered for purposes of implementation of an investment strategy shall not exclude low-cost and/or low-fee products available in in the market;
iv. the criteria for selecting the various financial instruments shall include all relevant characteristics of the financial instrument, including but not limited to its risks, complexity, costs, and fees; and
v. the selection process utilized does not include any bias that would tend to favor any financial instruments for which the broker-dealer, agent, or adviser receives any form of material compensation should the financial instrument be utilized by the client.
8) While the selection process conducted by an independent adviser of financial instruments must be of a broad and sufficient range, it is not required that the independent adviser assess every relevant product available on the market prior to making a recommendation to the client.
9) Where a broker-dealer, agent or adviser providing independent advice chooses to engage a third party to conduct an assessment and comparison of the investment strategies and/or financial products the broker-dealer, agent or adviser will then utilize, the broker-dealer, agent or adviser remains responsible for compliance with the requirements of this Subchapter 6, including but not limited to ensuring that the independent advice to be provided is based upon an adequate assessment of a sufficient range of investment strategies and financial products that are sufficient diverse to seek to meet the client’s needs and objectives.
10) Where the broker-dealer, agent, or adviser owns, or an affiliated entity of the broker-dealer, agent, or adviser, owns, in whole or in part, the issuer or provider of the financial product, the broker-dealer, agent, or adviser may retain status as an independent adviser if and only if:
i. the broker-dealer, agent, and/or adviser follow the process for investment strategy and financial product selection set forth above;
ii. the range of investment products considered is not limited to the financial products issued or provided by the broker-dealer, agent, adviser or any such affiliated entity, and a broad range lower-cost or higher yielding similar financial products are considered by the broker-dealer, agent, and/or adviser during the financial product selection process;
iii. the broker-dealer, agent or adviser undertakes sufficient measures to ensure that its, her, or his recommendations are free from bias. For example, a process to ensure the recommendation is free from bias would be to remove any incentives to recommend such product, such as by arranging that any receipt of additional fees resulting from the recommendation of the broker-dealer’s, agent’s, adviser’s, or affiliated entity’s products are rebated to the client, or credited against other fees paid by the client, to the extent permitted by applicable law.
11) If the independent adviser is not able to recommend a financial instrument that would seek to meet the financial circumstances, needs and goals of the client, the independent adviser shall not provide the client with a recommendation. For example, if an independent adviser providing independent advice on mutual funds considers that, given the financial circumstances of the client, that an immediate annuity product would better seek to meet the client’s needs and goals, but the independent adviser is not position to assess the range of available annuity products and/or to provide or recommend such annuity product to the client, the independent adviser should, in accordance with the independent adviser’s fiduciary duty to the client, either not undertake a recommendation to the client or undertake a general recommendation of the type of financial product that would be most appropriate and refer or suggest to the client that such product be obtained from a provider not affiliated with the independent adviser.
12) The selection process for investment strategies shall be undertaken by the independent adviser at least once during each two-calendar-year period.
13) The selection process for financial products shall be undertaken by the investment adviser at least once during each calendar year.
14) Independent advisers shall maintain records of their selection process.
15) Where the selection process for financial instruments cannot be undertaken without bias, or is not possible to undertake utilizing the selection process set forth above, the broker-dealer, agent, or investment adviser shall not present, promote or market itself, herself or himself as an “independent” nor “unbiased” nor “unprejudiced” nor “disinterested” nor “detached” nor “objective” nor “neutral” broker, agent, or adviser, nor shall similar terms be utilized nor shall advertisements or promotions be utilized that create such impressions.
d) “Restricted adviser” (“non-independent advice”) and “restricted advice” (“non-independent advice”)
1) The terms “restricted advice” and “non-independent advice” have the same meaning for purposes of this (chapter/subchapter/etc.).
2) The terms “restricted adviser” and “non-independent adviser” have the same meaning for purposes of this (chapter/subchapter/etc.).
3) Advice is that does not meet the requirements for independent advice shall be restricted or non-independent advice.
4) A broker-dealer, agent or adviser providing restricted advice shall disclose to the client the nature of the restriction by which the advice provided cannot be considered independent advice.
e) “No advice”
1) A broker-dealer or agent or adviser who does not provide advice may engage in the sale of a financial product to a client, provided the broker-dealer, agent or adviser:
i. satisfies any and all requirements imposed by the SEC and FINRA, including but not limited to the gathering of sufficient information from the client to ensure that the financial product is suitable for the client;
ii. confines its communications to the client to a discussion of the features and characteristics of the financial product;
iii. states to the client that no personalized investment advice may be provided to the client; and
iv. does not provide personalized investment advice to the client.
2) A broker-dealer, agent, or adviser may provide, directly or through its affiliates, financial products for which no advice is provided to the client, while at the same time the broker-dealer, agent, or adviser provides restricted advice to the client with respect to other investment strategies or financial products, provided that the broker-dealer or investment adviser implements sufficient controls to ensure that the restricted advice services and products and the no advice services and products are clearly separated from each other, and that clients are not likely to be confused as to when they are receiving either restricted advice or no advice.
3) A broker-dealer, agent or adviser who provides, to a client, products or services in which no advice is provided as defined herein, may not be considered to be an independent adviser or providing independent advice, but may be considered to also provide restricted advice for a portion of the client’s needs.
f) A broker-dealer, agent or adviser may provide independent advice and non-independent advice, but not as to the same client, and only as to separate or distinct clients. In such circumstances, the broker-dealer or investment adviser shall:
1) in any advertisement or promotion relating to the firm, not promote or market itself as “independent” nor “unbiased” nor “unprejudiced” nor “disinterested” nor “detached” nor “objective” nor as a “neutral” broker or adviser or dual registrant, unless such promotion or marketing makes clear that both independent and non-independent advice are provided;
2) inform each client, prior to the delivery of advice, whether the advice provided to the client is either independent advice or non-independent advice; and
3) implement sufficient controls to ensure that both types of advice services are clearly separated from each other, and that clients are not likely to be confused about the type of advice that they are receiving.
g) All broker-dealers, agents and advisers must utilize the form of the required disclosure as set forth in (chapter/subchapter/section) below, to denote that either:
1) independent advice is provided;
2) restricted advice or non-independent advice is provided;
3) no advice is provided; or
4) a combination of restricted advice and no advice is provided.
(PROPOSED STATUTE OR RULE) Uniform disclosure form for broker-dealers, agents, investment advisers, and investment adviser representatives
a) Whenever investment advice is provided to a client, then a uniform disclosure form (“UDF”) shall be completed and provided by the broker-dealer, agent or adviser to the client at the inception of the client relationship, and annually during each calendar year thereafter during the duration of the client relationship, which UDF shall be substantially in the form set forth below.
b) The UDF shall be and remain as a separate document and shall remain apart from and distinct from any other contracts, agreements, or other disclosures made to the client. If delivered electronically to the client, notification of electronic delivery of the UDF shall refer to: “Important Annual Disclosure” in the subject heading of the communication and no other substantial information shall be provided to the client in such communication other than the UDF.
c) Should any material modifications occur to the disclosures contained in the UDF previously provided to the client, more than 15 days prior to the annual re-delivery of the UDF, the broker-dealer and/or adviser shall modify the disclosures previously provided through a written amendment thereto. Such amendment need not be in the format of the UDF, provided that the material modifications are relatively minor.
d) The agent and/or adviser shall ensure that the client has received and reasonably understands the disclosures provided in the UDF and any amendments thereto. The agent and/or adviser shall fully and completely answer any questions posed by clients which relate to the subject matter of the UDF.
e) Completion and delivery of the UDF does not fulfill the entirety of the fiduciary or other duties owed to the client by the provider of investment advice.
f) The UDF provided shall be in substantially the following format and with substantially the following content:
UNIFORM DISCLOSURE FORM TO INVESTMENT CONSUMERS
WHO ARE IN RECEIPT OF INVESTMENT ADVICE
FROM INVESTMENT ADVISERS OR BROKERS
Name of Broker-Dealer (Company)
Providing Investment Advice:
Name of Investment Adviser (Firm)
Providing Investment Advice:
Note to dual registrants: complete both the “broker-dealer” and “investment adviser” listings above.
1. IS YOUR INVESTMENT PORTFOLIO INVESTED “PRUDENTLY”? Is the Prudent Investor Rule applicable to all or the majority of your investment portfolio?
Assets, if any Excluded:
All or the majority of your investment portfolio upon which we, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), provide investment advice is advised upon and/or managed according to the dictates of the prudent investor rule, which requires that such portion of your investment portfolio be managed as a prudent professional would manage the portfolio, after considering your needs, goals, investment time horizon(s). In satisfying this standard, we are required to exercise due care, skill, and caution. In adherence to the prudent investor rule, we possess a duty to minimize idiosyncratic (diversifiable) risk, we are required to not waste your assets, and we possess other duties.
While the majority of your portfolio is subject to the prudent investor rule, the following account(s) or investment assets are excluded from the application of the prudent investor rule:
All or the majority of your investment portfolio upon which we, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), provide investment advice is NOT advised upon and/or managed according to the dictates of the prudent investor rule. As such, you understand that additional risks, fees and costs may exist within your investment portfolio which exceed those in a prudent portfolio.
While the majority of your portfolio is NOT subject to the prudent investor rule, the prudent investor rule is applied by us to following account(s) or investment assets:
2. WHAT FORM OF INVESTMENT ADVICE IS PROVIDED TO YOU? Is the agent of your broker or the representative of your investment adviser an “independent adviser” or “restricted adviser” – or is “no advice” provided to you?
We, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), possess the ability to provide a sufficient range of relevant investment strategies and financial products available on the market which are sufficiently diverse with regard to their type and with regard to the number of issuers or product providers to ensure that your investment objectives can be appropriate met. As to any investment advice we provide to you, we are required to implement a due diligence process in which we compare a broad range of investment strategies and financial instruments.
We, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), can only provide “restricted advice” (also called “non-independent advice”), for the following reasons (set forth the restrictions here):
No Advice Provided
We, your broker-dealer firm (and agents thereof), do not provide investment advice to you.
We may describe the features and characteristics of a financial product or investment to you. We may not, however, advise you as to whether the financial product or investment is in your best interests or whether the financial product is the best product in the marketplace to seek you meet your needs and goals.
3. WHAT FORM OF RELATIONSHIP ARE YOU IN? Are you in a fiduciary-client relationship in which you are entitled to rely upon the investment advice you receive, or are you in an arms-length (seller-purchaser) relationship in which you must protect yourself?
Fiduciary-Client Relationship Exists
We, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), possess broad fiduciary duties to you in all aspects of our business relationship with you, including but not limited to:
1. The duty to act with due care with regard to any financial or investment advice we provide to you, which means that we must act with the skill, prudent and diligence of an expert in providing financial or investment advice to you.
2. The duty to act in your best interests, under the duty of loyalty, which includes the requirement to keep your interest paramount to our own interests, and that we act without regard to the financial or other interests of ourselves or our affiliated entities.
3. The duty to be completely honest with you, with a high degree of candor.
4. The duty to receive only reasonable compensation.
5. The duty to not undertake any material misrepresentations of fact to you.
A Seller-Purchaser, Arms-Length Relationship Exists
We, your broker-dealer firm (and agents thereof), are not acting as your fiduciary. In connection therewith:
1. Our relationship with you is that of the seller of a financial product to you, the purchaser of that product. We are in an arms-length relationship with you.
2. We may favor our own interests over yours. We are not legally required to act in your best interests.
3. We do not possess a broad duty of due care with regard to our financial product recommendations to you. Any product we recommend to you need only be “suitable.”
Your Broker or Adviser should check all those applicable, in the boxes below:
4. WHAT TYPES OF FEES AND OTHER COMPENSATION ARE RECEIVED BY YOUR BROKER-DEALER OR INVESTMENT ADVISER? What forms of compensation might your broker-dealer (or any affiliate thereof) or investment advisor (or any affiliate thereof) receive as a result of their relationship with you?
FEES PAID DIRECTLY BY YOU
Investment advisory fees paid directly by you based upon a percentage of the assets upon which advice is provided
Investment advisory fees paid directly by you of a fixed or flat fee nature, paid either annually, quarterly, or monthly
Investment advisory fees paid directly by you based upon hourly fees
Investment advisory fees paid directly by you for discrete projects
FEES PAID BY PRODUCT MANUFACTURERS OR OTHER INTERMEDIARIES
Sales commissions (including but not limited to front-end sales loads for mutual fund shares, and including but not limited to front-end commissions for annuities) resulting from sales or purchases of securities, other investments, or annuity/insurance products to you
Sales commissions in the form of deferred contingent sales charges or back-end loads resulting from selling or purchasing securities, other investments, or annuity/insurance products to or from you
Mark-ups and mark-downs in connection with principal trading of securities (i.e., where the broker-dealer firm purchases securities directly from you, or sells securities directly to you, from the broker-dealer’s own accounts)
For any securities sold to you, compensation derived from the issuer or stocks, bonds, or other securities relating to the investment underwriting activities of the broker-dealer
12b-1 fees paid by mutual funds to your brokerage firm, which fees last indefinitely as long as you own the fund (regardless of whether you continue to receive investment advice)
12b-1 fees paid by mutual funds to your brokerage firm, which fees will last for only a fixed period of time before they disappear, but which fees may continue during that period of time, regardless of whether you continue to receive investment advice
Other than 12b-1 fees, any other form of fees or trailing commissions paid to your brokerage firm resulting from the sale of securities, other investments, or annuity/insurance products to you, which fees or trailing commissions last indefinitely as long as you own the security, other investment, or annuity/insurance product (regardless of whether you continue to receive investment advice)
Other than 12b-1 fees, any other form of trailing commissions paid to your brokerage firm resulting from the sale of securities, other investments, or annuity/insurance products to you, which fees or trailing commissions last for only a fixed period of time before they disappear, but which fees may continue during that period of time, regardless of whether you continue to receive investment advice
Payment for shelf space received by your broker-dealer. (A shelf-space agreement occurs when a mutual fund pays this additional compensation in exchange for the broker-dealer preferentially marketing the shares of that mutual fund.)
(-cont.) FEES AID BY PRODUCT MANUFACTURERS OR OTHER INTERMEDIARIES
Marketing support payments paid by product manufacturers or intermediaries to your broker-dealer or investment adviser arising from the sales of securities or annuity/insurance products to you
Other revenue sharing payments paid by product manufacturers to your broker-dealer or investment adviser
Fees and/or commissions resulting from sales of securities for which your broker-dealer acts as underwriter or as part of an underwriting group
Any other fees and/or commissions received for referrals by your broker-dealer firm of you to any other product or service provider that are not set forth above
Receipt by your broker-dealer of payments for order flow from other brokerage firms (including but not limited to market makers) (these compensation payments benefit a brokerage firm for directing orders to different parties for trade execution)
Receipt by your brokerage firm of soft dollar compensation received from managed accounts (including but not limited to mutual funds). Note that Section 28(e) of the (federal) Securities Exchange Act of 1934 discretion with respect to an account shall not be deemed to have acted unlawfully or to have breached a fiduciary duty under state or federal law solely by reason of his having caused an account to pay more than the lowest available commission if that person determines in good faith that the amount of the commission is reasonable in relation to the value of the brokerage and research services provided.
Other than as previously described, any receipt by your broker or investment adviser of access to software, research, trading software, practice management and/or investment education (though attendance at conference, via webinars, written materials, or otherwise), or other support services from any other brokerage firm, custodian, or product manufacturer.
Any other forms of revenue sharing or other payments, paid by product manufacturers or intermediaries, to your broker-dealer or investment adviser arising from the sales of securities, other investments, or annuity/insurance products to you, other than as previously described: (Broker-dealer and/or investment adviser: adequately describe such forms of revenue sharing or other payment arrangements, in the space set forth below):