Monthly Archives: May 2016

A Letter from Our Society President

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Joshua M. Howard, CFA

With less than one month to go candidates are now in crunch time for the CFA examinations on June 4th. If you are a charterholder, you likely vividly remember the anxiety of these last few weeks before the exam, hoping that certain topics will be tested heavily, and that other topics will be avoided. You may also remember the constant checking to make sure you have the right ID, verifying that you packed enough writing utensils, practicing the route to River Centre (and maybe a backup route as well) and wondering how many backup batteries you really need for your calculator (is four too many?).

As we have for the past three years, CFA Society Minnesota provided prep classes at all three levels this year, offered over the course of three weekends in April and May. More than 60 candidates attended these classes, including a sold out Level II class. A big thank you to Travis Simon, our class coordinator, and all the instructors for the work they put in over the past few months helping candidates prepare for the exam.

In addition to those who took our classes many other candidates were involved in our study groups or used their Society membership to receive discounts on Schweser products. Candidate preparation is a core component of the work CFA Society Minnesota does, and I wish all candidates the best of luck on June 4th.

If you already are a charterholder please don’t forget about our post exam party, beginning at 4:30pm on exam day at the Eagle Street Grille in St. Paul. Come celebrate with the test takers at all three levels as they enjoy a much needed respite from studying and taking practice tests. Tell the candidates how great it will be when they finally pass Level III and receive the charter, at which point they can burn their CFA books in a celebratory bonfire – or, for the CFA nerds out there, prominently display them in their office. Just don’t tell them that the CFA exam nightmares will go away (e.g. forgetting your ID, being asked only FSA and quant questions, going to the wrong location, the Institute deciding to add a fourth level before you finish, etc.). As a couple coworkers of mine were discussing just the other day, including one who got the charter over 30 years ago, those nightmares still occasionally occur.

Joshua M. Howard, CFA
President, CFA Society Minnesota

Department of Labor Fiduciary Rule, End of the World or No Big Deal*

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Jonathan Levy, J.D.

Unless you have been living in a cave, you have probably heard that on April 6, 2016, the Department of Labor (“DOL”) announced that investment professionals that provide investment services to IRA’s and other employer-sponsored retirement plans will be subject to fiduciary duties.  This event has been described as the coming of the apocalypse by the brokerage industry, or about time by investment advisers because these folks have always been subject to fiduciary duties.

Suitability vs Fiduciary

Prior to the effectiveness of the DOL’s action, investment professionals that provide advice to IRAs are not subject to ERISA’s prohibited transaction rules.  This means that broker-dealers and their registered representatives are subject to a suitability standard under FINRA rules.  Suitability essentially requires that the investment professional have a reasonable basis to believe that a recommended investment strategy is suitable for a client based on information available to the investment professional through reasonable diligence.  A fiduciary standard generally requires that the investment professional put the client’s interests first, act with utmost good faith, provide full and fair disclosure of material facts, avoid misleading clients, and disclose conflicts of interest.

Conflicted Advice

The DOL claims that investment firms not subject to a fiduciary standard steer IRA clients into investment products that have higher fees and lower returns.  The DOL alleges that these conflicts of interest cost $17 billion a year, and result in a 100 basis point lower annual average return.  The DOL claims that $1.7 trillion of IRA assets are invested in products that provide payments to investment professionals that generate conflicts of interest.  What the DOL is focused on are traditional securities brokerage commissions, revenue sharing with plan administrators, front-end loads, 12b-1 fees and other payments to brokerage firms for IRA asset management.

Best Interest Contract Exception

In response to the very loud complaints and political influence from the brokerage industry, the DOL adopted a special exception for fees to broker-dealers.  Under the Best Interest Contract Exemption or BICE, brokers can advise IRAs and receive revenue sharing, 12b-1 fees, brokerage commissions and even sell proprietary products managed by the broker, if the broker-dealer commits to putting client’s interests first, adopts certain anti-conflict of interest policies and procedures, and discloses conflicts that could affect the broker’s judgment as a fiduciary.

IRA Beneficiaries Can Bring Claims; Effectiveness

Finally, the new DOL rules permit IRA and other retirement plan beneficiaries to bring private causes of action or claims against investment professionals that violate the new rules.

Because these rules will require significant and expensive changes in the documentation and compliance policies of many large broker-dealers and their registered representatives, there is a long period of time before the rules take effect.  The new fiduciary standard is scheduled to take effect in approximately one year, and the BICE provisions will go into effect in January 2018.  But stay tuned, the brokerage industry is still complaining, and Congress has threatened to act against the rules.  Certain players in the brokerage industry have also threatened to try to block the new rules in court.

Why the Big Fuss?

What is the big fight really about?  As usual for big policy debates, it is about money, lots and lots of money.  With the baby boomer generation retiring there is a lot of retirement money to be managed in IRAs.  According to the Investment Company Institute’s 2015 Fact Book, as of the end of 2014, employer-sponsored retirement plan assets in the United States were approximately $24.7 trillion.  Of that sum, $14.2 trillion consisted of defined contribution and IRA assets, with the remainder in defined benefit plans.  Over the past fifteen years, the total assets in retirement plans have increased significantly, and the share of assets in defined contribution and IRAs has continued to grow as defined benefit plans continue to shrink.  IRA assets have grown from $4.7 trillion to $7.4 trillion in the past seven years, with mutual funds by far the largest asset class of IRA assets.  For the next 14 years, approximately 10,000 baby boomers will turn 65 every day.  There is a lot of money to be made on investment management of those assets  and therefore a lot of stakeholders are fighting about these new rules.  To be continued….

 

* Jonathan Levy is a securities lawyer at Lindquist & Vennum LLP, and is a member of the Board of Directors of the Minnesota CFA Society.