Articles Tagged with Best Interest

While the majority of the Department of Labor’s new fiduciary rule, Prohibited Transaction Exemption 2020-02 (“PTE 2020-02), became enforceable on January 31st, some of the requirements pertaining to rollover recommendations are set to be enforced on July 1, 2022.

As detailed in this blog post, the DOL provided transition relief in its Field Assistance Bulletin, FAB 2021-02 by extending the enforcement date of PTE 2020-02 through January 31, 2022 for investment advice fiduciaries who are working diligently and in good faith to comply with the “Impartial Conduct Standards” for any transactions that are exempted under PTE 2020-02. These standards include a best interest standard, a reasonable compensation standard, and a requirement to avoid any materially misleading statements about the recommended transaction and other relevant matters.

PTE 2020-02 also requires investment advice fiduciaries to document the specific reasons any rollover recommendations from an employee benefit plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another is in the best interest of the retirement investor. PTE 2020-02 further requires this documentation to be provided to the retirement investor prior to engaging in the rollover. In FAB 2021-02, the DOL announced that it would not enforce the documentation and disclosure requirements for rollover recommendations under PTE 2020-02 through June 30, 2022.
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Even before Robinhood Financial LLC entered the spotlight late last month for having halted trading in Game Stop during that company’s unprecedented short squeeze, Robinhood had already been charged with allegedly violating state securities laws in connection with its business practices. In December of last year, the Securities Division of the Massachusetts Secretary of the Commonwealth sued Robinhood, alleging that the company had engaged in aggressive marketing tactics aimed at young, inexperienced customers. The complaint was based in large part on alleged violations of the duty to act in customers’ best interest, as required by regulations adopted in March 2020 imposing upon broker-dealers the same fiduciary duty applicable to investment advisers operating within the Commonwealth.

According to the complaint, Robinhood failed to act in the best interests of its customers and exposed them to unnecessary trading risks. The Company directed its market at young, inexperienced investors. When they opened accounts, the Company encouraged its customers to use the trading platform frequently and approved unqualified clients for options trading. Although not mentioned in the suit, a 20-year old college student from Illinois committed suicide last summer because he mistakenly thought he owed over $700,000 based on options trades he had made using the Robinhood platform. Earlier this week his parents sued Robinhood, making allegations that echoed the Massachusetts regulator’s charges.

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