5th Circuit Court of Appeals Ruling on DOL Rule - What does it mean?

5th Circuit Court

5th Circuit Court of Appeals Ruling on DOL Rule – What does it mean?

Skating to where the puck is - More law suits, more appeals, more politics, more internal meeting and changing direction.

Skating to where the puck is going to be - What do BDs need to do?

  1. Reduce conflicts – levelize compensation (fair and reasonable), disclose
  2. Know your client better – enhance profiling / planning
  3. Conviction based product universe and recommendations – perform due diligence on your products

Do’s and Don’ts

  1. Do watch the SEC as they unveil their plan
  2. Don’t focus on the BIC
  3. Do focus on the Impartial Conduct Standards for retirement and taxable accounts
  4. Do understand what your primary regulators are saying - SEC and FINRA focus areas for products in 2018

FINRA and SEC 2018 Priorities Excerpt

FINRA 2018 Annual Regulatory and Examination Priorities Letter 

FINRA will focus on:

1) Examination of the controls Firms have in place to meet suitability obligations.

  • How firms identify products that are subject to new product vetting
  • The vetting process itself
  • How controls are put in place to ensure personnel are appropriately educated & trained on the sale and supervision of the product.

FINRA provided the following guidance on the vetting process:

  • Firms should identify the risks associated with the product and include those risks in product training.
  • Particular attention should be paid to situations where registered representatives recommend complex products to unsophisticated, vulnerable investors.

2) Firm’s handling of products where FINRA has observed firms experiencing problems implementing effective controls:

  • UITs
  • Multi-share-class products
  • High-risk or complex products

3) Accounts being transferred from front-end sales charge products in brokerage accounts to fee-based accounts.

SEC 2018 National Exam Program Examination Priorities

SEC will focus on:

1) Services & products sold to Senior Investors with retirement accounts.

  • Investment recommendations
  • Sales of Variable Insurance Products
  • Sales of Trade Date funds

2) Sales of Mutual Funds & ETFs to Retail customers. Focus on:

Mutual Funds that have experienced poor performance or liquidity (subscriptions & redemptions relative to peer group.

  • Funds managed by advisors with little experience managing registered investment companies
  • Funds that hold securities that are potentially hard to value in times of market stress (auto, student, consumer loans, CMB securities).
  • Mutual funds and ETFs that track custom-built indexes and any conflicts with the advisor and the index
  • ETFs with little or no secondary market trading volume or at risk of being delisted.

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