SEC’s new broker rule – issues for plan fiduciaries

In our recent article on the Securities and Exchange Commission’s new broker-dealer standard of conduct rule we focused on how it may change how broker-affiliated plan service providers (e.g., call center operators) interact with plan participants. In this article, we consider how the SEC’s new, detailed, and significantly higher standard of conduct rules for brokers may affect plan/sponsor fiduciaries.

ERISA duty to prudently select and monitor plan service providers

In Field Assistance Bulletin 2007-1, DOL discussed at length the obligations of sponsor/plan fiduciaries with respect to the selection and monitoring of plan service providers, including service providers offering participants “investment advice:”

With regard to the prudent selection of service providers generally, the Department has indicated that a fiduciary should engage in an objective process that is designed to elicit information necessary to assess the provider’s qualifications, quality of services offered and reasonableness of fees charged for the service. … In applying these standards to the selection of investment advisers for plan participants, we anticipate that the process utilized by the responsible fiduciary will take into account the experience and qualifications of the investment adviser, including the adviser’s registration in accordance with applicable federal and/or state securities law, the willingness of the adviser to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants, and the extent to which advice to be furnished to participants and beneficiaries will be based upon generally accepted investment theories.

In monitoring investment advisers, we anticipate that fiduciaries will periodically review, among other things, the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment adviser, including whether the adviser continues to meet applicable federal and state securities law requirements, and whether the advice being furnished to participants and beneficiaries was based upon generally accepted investment theories. [Emphasis added.]

With respect to this language, note that DOL is using the term “investment advice” in the ERISA context, which would cover much more than, e.g., “advice” given by an IA under the securities laws, and that the plan fiduciary’s duty to monitor applies to any plan service provider – not just those providing investment “advice” but also, e.g., those merely providing investment “education.”

Sponsor/plan fiduciary enforcement of the broker rule?

Some have criticized the new broker rule as lacking an adequate enforcement mechanism, and the SEC explicitly disavowed creating “any new private right of action.” This contrasts with DOL’s approach in the Fiduciary Rule (subsequently vacated by the Fifth Circuit), which would have imposed (for most providers) a “Best Interest Contract” requirement that created privately enforceable obligations.

In light of the new (and significantly elevated and detailed) broker standard of conduct rules, the application of the plan fiduciary’s duty to monitor “whether the adviser continues to meet applicable federal and state securities law requirements” deserves special attention. At a minimum, sponsor/plan fiduciaries will want to develop a view of the extent of their duties in this regard and discuss with service providers how the conduct of broker-affiliated service providers will be monitored.

The critical importance of advice given with respect to rollovers

For DOL, the most significant issue is (and has been for a decade) what limits may be placed on the advice/recommendations that may be given to a participant who is considering taking a plan distribution, particularly at retirement. This was also a key issue for the SEC. Re-quoting language we quoted in our article on the broker rule:

As a best practice, firms also should encourage their associated persons to discuss the basis for any particular recommendation with their retail customers, including the associated risks, particularly where the recommendation is significant to the retail customer. For example, the decision to roll over a 401(k) into an IRA may be one of the most significant financial decisions a retail investor could make. Thus, a broker-dealer should discuss the basis of such recommendations with the retail customer. [Emphasis added.]

Broker-affiliated plan call center operators will often be the persons giving advice/making recommendations to participants in this context. The broker rule articulates a detailed “best interest” standard for these recommendations, together with an obligation to mitigate certain conflicts.

Given participants’ ability under ERISA to sue plan fiduciaries for breaches of fiduciary duty, could plan fiduciaries’ obligation to monitor compliance with federal securities laws become a target for plaintiffs’ lawyers? At this point, we do not know. But the risk cannot (again, at this point) be dismissed.

Guidance from DOL

As noted in our May Legislative Update,  in May 1, 2019 testimony before the House Education and Labor Committee, in response to a question about DOL’s plans to protect workers against biased investment advice, Secretary of Labor Acosta stated that “we will be issuing new rules in this area.” There have been persistent reports to this effect.

An optimist could hope that DOL will publish guidance deferring to the SEC on the enforcement/supervision of compliance with the new broker rule. A pessimist might fear that DOL, having been stymied in its own effort to develop rules in this area, will take the new broker rule as an opportunity to reapply some of the principles developed in the Fiduciary Rule – via the plan fiduciary’s duty to monitor plan service providers.

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We will continue to follow the issues that the new SEC guidance raises for plan sponsors and sponsor fiduciaries.