fi360 Blog

Fiduciary Links: 403(b) Compliance Summit Report a must read for all retirement plan professionals

>>>>An article in PLANSPONSOR this week alerted us to the release of a report from ASPPA’s National Tax Sheltered Accounts Association’s 403(b) Compliance Resolution Summit. The purpose of the summit is to “identify service issues and develop  best practices for the resolution of those issues.” Included in the report from this year’s summit are recommendations related to new 408(b)(2) and 404(a)(5) fee disclosure regulations , the effects of the DOL’s proposal to redefine “fiduciary” and other compliance and plan servicing concerns.

 While specific to 403(b) plans, the report and recommendations are a valuable resource for any professional servicing retirement plans and wrestling with how best to prepare for upcoming regulatory changes. Here is an overview of just some of the recommendations made by the participants at the event:

• In regards to fee disclosure:
  • How to better educate plan sponsors
  • Set expectations at the outset as to who is responsible for which aspects of disclosure
  • Perform a self-evaluation to determine 408(b)(2) obligations
• In regards to participant advice and fiduciary issues:
  • “[R]egardless of whether the definition of fiduciary remains as it has been for the last 35 years, or in the alternative may be expanded, it is always a best practice for employers and participants to select advisors who are competent and helpful, and who will provide full disclosures as to fees and any potential conflicts as it may affect the plan or the participant(s).”

A summary of the report, including a link directly to the report itself, can be found on the NTSAA’s website.

>>>>If you are reading this blog post, you might be inclined to share a particular link you think is interesting or insightful or instructive to your prospects and clients. You might even choose to do so by using a social media platform, such as Twitter, LinkedIn, Facebook, or others. The publishers of those links certainly make it easy to do so with buttons that remove any manual steps for “Liking” or otherwise sharing the article to your audience. However, an article in RIABiz last week reminds you to think first before doing so, lest you be in violation of your firm’s policies or even SEC compliance.  The article summarizes SEC guidance on the issue of social media use by advisers, as well as recommending you be aware of your company’s policies and to pay particular attention to violation of the “testimonial” rule. Fi360 General Counsel Kristina Fausti did a similar blog post just a couple of weeks ago that points advisors to the pertinent guidance as to their use of social media.

Now on to the rest of the best links from the past week:

2012 State of the Union address recap

While Tuesday’s State of the Union address focused largely on jobs and the economy, which was expected, President Obama did touch on some financial services issues. Below are two excerpts from his speech, which can be found in its entirety on the White House site.

On financial reform and regulation:

And I will not go back to the days when Wall Street was allowed to play by its own set of rules. The new rules we passed restore what should be any financial system’s core purpose: Getting funding to entrepreneurs with the best ideas, and getting loans to responsible families who want to buy a home, start a business, or send a kid to college.

So if you’re a big bank or financial institution, you are no longer allowed to make risky bets with your customers’ deposits. You’re required to write out a “living will” that details exactly how you’ll pay the bills if you fail – because the rest of us aren’t bailing you out ever again. And if you’re a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can’t afford with confusing forms and deceptive practices are over. Today, American consumers finally have a watchdog in Richard Cordray with one job: To look out for them.

We will also establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments. Some financial firms violate major anti-fraud laws because there’s no real penalty for being a repeat offender. That’s bad for consumers, and it’s bad for the vast majority of bankers and financial service professionals who do the right thing. So pass legislation that makes the penalties for fraud count.

And tonight, I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.

A return to the American values of fair play and shared responsibility will help us protect our people and our economy. But it should also guide us as we look to pay down our debt and invest in our future.

On insider trading by members of Congress:

I’ve talked tonight about the deficit of trust between Main Street and Wall Street. But the divide between this city and the rest of the country is at least as bad – and it seems to get worse every year.

Some of this has to do with the corrosive influence of money in politics. So together, let’s take some steps to fix that. Send me a bill that bans insider trading by Members of Congress, and I will sign it tomorrow. Let’s limit any elected official from owning stocks in industries they impact. Let’s make sure people who bundle campaign contributions for Congress can’t lobby Congress, and vice versa – an idea that has bipartisan support, at least outside of Washington.

It was encouraging to see the insider trading issue discussed. It has been getting a lot of coverage since the 60 Minutes story late last year. Of course, it was telling that the House chamber was awkwardly silent during that portion of the speech.

With the focus Dodd-Frank has put on the fiduciary duties of financial advisors, it is only fair that Congress follow the same principles. Just as a trusted advisor is expected to act in the best interests of his or her clients and to avoid or manage conflicts of interest, so should elected or appointed officials be beholden to the constituents they serve, i.e., the citizens of this country.

Fiduciary Links: 2012 State of the Union address

Tomorrow, President Obama will deliver the annual State of the Union address to Congress. Beyond the expected emphasis on jobs, the economy and the military, one thing we'd like to see is a raising of the fiduciary bar for members of Congress and other public officials. If we could give him a few bullet points of our own, we would ask him to request Congress for legislation to promote ethics in government, including provisions that would:

• require a statutory fiduciary duty for Congress, the President, and political appointees.
• set up blind investment trusts for all elected and politically appointed federal officials.
• set up an independent ethics agency for Congress, using the GAO structure to limit political influence (fifteen-year appointment for agency head).
• implement and better enforce more uniform ethics rules and procedures across government as it relates to former staff going to work and lobbying for regulated entities, including ‘cooling off’ periods before being paid to lobby or ‘consult’ on public policy issues.
• provide meaningful campaign funding reform.

The White House has an interactive feature for the State of the Union address that will be streaming the event along with other information, as does the Speaker of the House, to cover the Republican response.

Now on to the rest of the best links from the past week:

The latest on social media guidance from federal and state regulators

In an increasingly electronic world social media has become an important communications tool, and many advisors find themselves entering the evolving world of media and communications to connect with current and potential clients.  Regulators have taken note and issued guidance to direct advisors and their firms on how to ensure their social media use complies with existing laws and regulations.    

With guidance available from FINRA in 2010, fi360 presented a webinar in December 2010 on building a strategy for effectively using social media and managing risk associated with social media use.  Now, just a little more than a year later, the SEC and a state regulator have issued guidance for investment advisers.  With greater direction now available for both broker-dealers and investment advisers on social media, it’s more important than ever for all advisors to know the rules of the road.   

Fiduciary Links: Tittsworth opines on adviser oversight costs

>>>>Last month, the Boston Consulting Group released its report on the costs of adviser oversight, finding that the cost of adequately funding the SEC to perform the task would be at least half as expensive as the various SRO-based options also on the table. Last week, David Tittsworth, executive director of the Investment Adviser Association, one of the report’s co-sponsors, wrote a piece for AdvisorOne, summarizing his thoughts on the study. His basic conclusions being:

• If SEC federal funding levels were kept at their current level and the agency were to collect user fees only for the additional resources it needs to conduct proper oversight, the cost difference is even greater.
• FINRA’s opposition to the report comes at no surprise and he challenges them to release their own report with their own methodology and see if they can substantiate their claims.
• When you consider that the draft SRO bill from Rep. Bachus would exempt some of the largest advisory firms, the cost for smaller firms becomes even greater.

And this just addresses cost issues, not to mention that the SEC is the best option from a functional and cultural standpoint as well. 

>>>>If you follow us on Twitter, you may have noticed that we changed our handle from @fiduciary360 to @fi360. If you already follow us on Twitter, you don’t need to do anything else to continue following us, we just have a few more characters to work with now. If you don’t already follow us, make sure you check it out. We tweet the best fiduciary headlines out each day and Twitter gives you some great opportunities to interact with other advisors, organizations, journalists, academics, etc.

Now on to the rest of the best links from the past week:

Answering your questions on asset allocation for volatile markets

A few weeks ago, fi360 hosted a webinar on asset allocation for volatile markets. Our guest presenters, Harold Evensky, President of Evensky & Katz Wealth Management, and Roger Gibson, Chief Investment Officer of Gibson Capital, discussed asset allocation in today's markets, looked at the importance of understanding a client's risk tolerance, and examined the relevance of Modern Portfolio Theory. A recording of the webinar and the slides are now available for download on our website (AIF and AIFA designees should access the recording via the Designee Portal in order to receive continuing education credit).

The session led to many questions from the audience looking for further insights and clarification that we were unable to address in the time allotted. Although, Harold and Roger were kind enough to answer the remaining questions, which we are happy to present in the following Q&A:

Q: What are your future expected returns for US and International stocks and do you expect the risk premium for US stocks to significantly erode?

Harold: We currently use an assumption of a 2 ½% real return on bonds and 6% on stock. Our investment committee is currently lowering that to 2% for bonds and 5% for stock. Our inflation assumption is 3%.

Roger: For modeling purposes, we are estimating a future compound return of 6.9 percent for U.S. stocks and 7.3 percent for Non-U.S. stocks.   In absolute terms, these returns are low relative to long-term historical averages.  The returns relative to bonds, however, are currently at a fairly normal spread.

 

Fiduciary Links: No end in sight for the fiduciary wait

>>>>At one point, shortly after Dodd-Frank was passed, there almost seemed to be a race between the SEC and DOL to see who would get out their fiduciary rule first. Now, however, who knows when we'll see a new rule from either.

The SEC's 2012 schedule for implementing Dodd-Frank rules lists fiduciary rulemaking under "dates to be determined" (see Title IX, sec. 913, near the bottom of the page). Meanwhile, Reuters reported last week on a request sent from the DOL to various securities trade organizations for an "inordinate amount of data" that seemingly would be used to formulate the cost-benefit analyses that the industry pressed DOL for with the release of the initial rule last year. A quote in the article speculates that the requests may have been a strategic move by the DOL. Nonetheless, it looks as if the DOL rule, too, is a ways off and, from here, it is tough to see just when we might expect these rules to come out.

>>>>Regardless of when we might see the DOL rule, Chris Carosa of Fiduciary News has a good take on what fiduciary progress to expect for retirement plans in 2012. With fee disclosure rules fully coming into effect, the affects won't be insignificant. Plan sponsors are coming to understand the scope and magnitude of their responsibilities much more acutely and many are going to see some eye-opening data on fees and expenses.

Now on to the rest of the best links from the past week:

Why the SEC Will Adopt a Fiduciary Rule

Will she or won’t she?  That is now the question many SEC watchers are beginning to ask -- whether SEC Chairman Mary Schapiro will be able to withstand the political heat of an election year in moving to adopt a fiduciary rule for brokers and advisers. 

These doubts began to fester last summer in the wake of the SEC’s court loss over the proxy access rule.  In July, the D.C. Circuit Court of Appeals held that the Commission acted “arbitrarily and capriciously” in failing to adequately assess the rule’s economic impact.  However, given other recent legal defeats by the SEC on the same issue, it is clear that Schapiro must move cautiously on the fiduciary rule in particular. 

Compounding her dilemma is the backdrop of the November presidential election.  If it results in a Republican win, Schapiro will most likely be out of a job.  The next SEC chairman would not likely share the same enthusiasm for raising broker standards.  Given this possibility, look for Schapiro to do just the opposite – and that is work aggressively to protect her 20-year legacy as one of the top securities regulators in the country.  Thus, contrary to current expectations, she will move forward and adopt a fiduciary rule in 2012.

Last summer, as the first anniversary of the adoption of Dodd-Frank approached, the question was not so much if, but when, Schapiro would push for adoption of a uniform fiduciary standard for federally registered broker-dealers and investment advisers.

But the seemingly unrelated lawsuit filed by the Business Roundtable and U.S. Chamber of Commerce in July challenging the SEC’s proxy access rule set back those efforts across a broad front of pending rules under Dodd-Frank.  For the third time in recent years, the Circuit Court vacated an SEC rule based on an alleged failure to adequately assess the economic impact of a proposed rule.  Not only did the court reject the SEC’s economic analysis for this latest rule, but in a withering critique, said

“…the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”

And that was even before the judges got warmed up in their 21- page decision.

By late August, The New York Times published an incisive analysis of the problems facing the SEC after the Chamber’s latest win in court.  Not only would the Commission have to tread carefully in crafting other rules under Dodd-Frank, but as the Times noted, while Wall Street’s powerful lobbying arm might force the agency to yield an occasional loophole, “judicial rulings can halt new rules altogether.”  And, it added, industry lawyers were now huddling to pinpoint the next big legal fight.

In view of this new aggressive front opened by the industry in the courts, and the verbal flogging the SEC chairman receives every time she’s called to testify before the Republican-controlled House, conventional wisdom might suggest that the fiduciary rule for brokers and advisors is dead in the water.  After all, Dodd-Frank only required a fiduciary study under Section 913 of the law, not a rule. 

However, Schapiro’s political skills have been honed and sharpened over the years as a seasoned Washington insider.  She will not back down without a fight.  Much of her political skills have been learned over the past quarter of a century previously as an SEC commissioner, then chairman of the CFTC, and then president of NASD Regulation and Chairman and CEO of FINRA.  A thin-skinned regulator would not have survived this long.

While the SEC economists are crunching numbers on the economic impact of a fiduciary rule, she and select advisors on staff, some of them with pedigrees as former Hill staffers on the committees overseeing Wall Street, will have made some careful political calculations of their own. 

One of the most important is the political time frame for proposing and adopting a rule.  Time is quickly running out with the presidential election just 11 months away.  She is probably also acutely aware, as noted in a recent Chamber report on structural reform at the SEC, that few chairmen serve for the full, five-year term.  In fact, only two out of 13 have accomplished that modest feat since 1970.

Given that the presidential contest is a toss-up, it is easily possible that Schapiro will no longer be at the SEC helm next January 20th. 

She is also well aware that any agency rule must conform to the federal Administrative Procedure Act.  Prior to the mid-90s, this was not a problem.  While the APA then offered a significant barrier to industry in challenging federal agency rules (the standard being that the agency must have acted in an ‘arbitrary and capricious’ manner), that bar has been lowered thanks to an accommodating federal bench and, more importantly, a gift from a former Republican Congress.  In 1996, Newt Gingrich’s ‘Contract with America’ Congress set the stage by passing a securities reform package that included mandatory cost-benefit analyses for new SEC rules. 

However, the securities industry didn’t notice the potency of this provision as a legal weapon until the mid-2000s.  Or maybe it didn’t need to, since it was able to exert a significant amount of influence until recent scandals caused the SEC to crack down.  Since 2004, though, SEC rules have taken a beating in court at least five times, with business groups racking up a perfect batting average against the SEC, including three wins based on cost-benefit issues.

What the APA does provide is considerable flexibility in allowing an agency to set comment deadlines, to open a new comment period if needed to demonstrate to a court that it diligently reviewed points that were overlooked the first time, and in adopting final rules.  However, Schapiro will be constrained by presidential politics into compressing a fiduciary rule package into 12 months.  But the APA should allow the SEC to easily move forward and adopt a rule within 12 months.

If the SEC were to proceed, then it would probably have to propose a fiduciary rule by May at the latest.  This would provide 90 days for comment, and then sufficient time for the SEC to adopt a final rule in mid- to late autumn.  The effective date of the new rule would probably be pushed out until the summer or fall of 2013.   And it will likely be stayed if a lawsuit is filed. 

Under the APA, a lawsuit must be filed within 60 days after final rule adoption.  If recent cases against the SEC are any indication, it will happen within days of the SEC vote, not weeks or months later.  The legal process before the DC Circuit Court of Appeals, even if expedited, will take at least several months for a decision.  By that time, Schapiro may be long gone.  However, her legacy will have been assured.  Thus Mary Schapiro’s time to act is now.

Fiduciary Links: Will 2012 bring a new fiduciary rule proposal?

The new year is upon us, and with that comes the question, will this year bring about a new fiduciary rule proposal? There is no shortage of opinions on every aspect of the SEC’s rulemaking, and a recent AdvisorOne article shows us just that.

SEC Chairman, Mary Schapiro, stated the fiduciary rule proposal will be “business model neutral,” which most interpret to mean that the differences between the broker and independent advisor business models will be taken into account. Harold Evensky, one of the speakers during our most recent webinar indicated that he is not concerned if this simply means allowing for commissions and proprietary products.  However, he also indicated that the rule must include the core elements of a fiduciary relationship.  David Tittsworth, also quoted in the article, feels that Section 913 from the Dodd-Frank Act creates a “fairly complicated roadmap” which equates to a delicate balancing act that the SEC needs to orchestrate.  Barbara Roper is doubtful the SEC will make much progress in writing the rule because it is so controversial.

Only time will tell how this rulemaking process plays out. 

Now on to the rest of the best links from the past week: