CCO Series - Client Suitability

As a fiduciary, an RIA firm is required to make investment decisions in the best interests of its clients. When making decisions regarding the investment options for accounts an RIA firm needs to be able to defend such decisions as being reasonably suitable to the goals and needs of its beneficial owners. Regulators will seek to ensure that decisions made by the firm during the course of providing its services primarily benefit the client and are suitable for a particular account's objectives. Documentation that define a fund's investment objectives or a model portfolio strategy will be compared against the trading history and the decisions made for clients to validate whether or not the firm is making suitable investment decisions when providing its services.

RIA Client Suitability In a Nutshell

Client suitability starts with information about how the RIA firm's investment managers will provide its advisory services and the information about the client or fund that will be relied upon to guide those decisions. For a typical retail RIA situation, this may include your client profile, risk tolerance questionnaire, investment policy statement (IPS), or client notes capturing similar information. For structured investment products this may include the operating agreements, offering documents, and similar information about the funds, parties and entities involved. As these documents are executed, modified, updated or amended the advisor should keep and maintain this additional documentation for their firm's books and records.

Risks related to strategies used by an RIA firm must be disclosed to clients through Form ADV. Specifically in Form ADV Part 2A, the Disclosure Brochure, Item 8 Methods of Analysis, Investment Strategies and Risk of Loss should contain information regarding how the firm's investment management services will be applied to the client's accounts and the potential losses that can occur due to the way the firm will invest the client's assets. It is important for firms to review these disclosures and ensure they accurately reflect the firm's investment methods and cover the risks related to the firm's advisory services.

Confirming Suitability

After collecting a client's information, having them sign an advisory agreement and providing a copy of your ADV and other new client paperwork, suitability becomes a compliance matter for the relationship as you move to digest the information and start making investment decisions for the client's account(s). While your documentation may tell the client to notify your firm of any changes to their profile, goals or objectives, every RIA firm still has an obligation to reach out to the client and confirm the information you have is still accurate and that ultimately to confirm your current understanding of what is suitable for that client.

Confirming suitability can take the shape of having the client complete a new risk questionnaire, sign a new IPS, or to have a meeting with the client where you discuss the management of their account and address suitability matters. Documenting this confirmation is critical to the firm's books and records for compliance purposes on this topic, and can take the form of client notes indicating suitability was discussed and the results of that discussion, or the updated formal documents such as the questionnaire or IPS. For fund managers, this activity means ensuring that the decisions being made for the fund are reasonably accomplishing the objectives of the fund as described in its documentation and ensuring that due diligence documentation is retained for various non-public investments. By having this documentation in your firm's books and records you can demonstrate that your firm has upheld their fiduciary duty when making investment decisions for its various clients.

Through the Regulator's Eyes

Regulators expect RIA firms to maintain documentation on each advisory client to support the investment decisions made for their account(s). During an examination, regulators will typically ask firms to provide their risk questionnaires or similar documents used to obtain information about their clients, and will also request information about trades in client accounts, and will reconcile the two to ensure that decisions made for clients are suitable and that there is a rational basis between the documentation, analysis, and investments. Further, regulators will review the information in your firm's disclosure brochure to reconcile to the types of investments to ensure that the strategies and risks are properly and fully disclosed to clients.

CCO Best Practices

Conduct a random sampling review of client files to verify that suitability is appropriately documented. Run a comparison between the client's trading history and the suitability documented to ensure investment decisions are in line with investment objectives. Validate that the last outreach attempt to each client is within one year. Additionally, review your firm’s client intake/onboarding and ongoing review process to ensure you are capturing adequate information to make, or continue to make, appropriate investment decisions in client accounts and provide advice that is in the client’s best interest.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

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Protecting Vulnerable Adults from Financial Exploitation

The organization that represents the state securities agencies, North American Securities Administrators Association (NASAA), recently announced that its membership had voted to adopt a model act designed to protect vulnerable adults from financial exploitation.¹ The model act, titled “An Act to Protect Vulnerable Adults from Financial Exploitation”, is now available for states to enact as legislation or implement through regulation. In addition, two new rules have been proposed by FINRA, which are also designed to also help combat financial exploitation of vulnerable adults.² Finally, to bring more attention to this issue, the Consumer Financial Protection Bureau (CFPB) issued a report directed at financial institutions aimed at combating elder financial exploitation.

Protecting Vulnerable Adults in a Nutshell

Vulnerable adults are defined as persons over 65 years of age and those that qualify for protection under a state adult protective services statute. The protections for these individuals impact broker-dealers, investment advisor representatives, and those who serve in a supervisory, compliance, or legal capacity for broker-dealers and investment advisors. Generally, it will mean that as you are dealing with seniors and adults with disabilities, you may have additional responsibilities and a small amount of flexibility from regulators in dealing with certain situations.

Financial Exploitation

The type of financial exploitation that potentially could be stopped is the unauthorized use of the vulnerable adult’s assets, including when a power of attorney, guardianship, or conservatorship is used to make decisions harmful to the client. Both NASAA and the federal agencies have compiled evidence showing that trusted caregivers may obtain control over the vulnerable adult’s assets, then deprive them of the assets or convert the assets by exploiting the services of financial institutions including broker-dealers and investment advisors.³

Possible Changes

State securities regulators, FINRA and the CFPB may begin to incorporate regulatory changes to address this public concern. Advisors that have a reasonable belief that financial exploitation has been attempted or has occurred among their clients may be required to report it to the appropriate regulator and adult protective services agencies. Updates to state and federal rules may also allow advisors to notify any third parties designated by clients of their suspicions of financial exploitation, excepting any third party that are suspected to be the part of the financial exploitation. Finally, state rules may allow advisors to initially delay disbursements from an account of a vulnerable adult for up to 15 business days if, after review, there is suspicion that the disbursement may result in financial exploitation. The advisors may also extend the delay of disbursement for an additional 10 business days at the request of either the state securities regulator or adult protective services.

Crucially, NASAA’s model act grants immunity from administrative or civil liability for advisors when reporting to state regulators and agencies, notifying appropriate third parties, and delaying disbursements based on reasonable suspicions of financial exploitation while acting in good faith. However, the advisor will be required to provide records, including historical records, relevant to the suspected financial exploitation to the state’s adult protective services or law enforcement. As with all things compliance your books and records are very important.

CCO Best Practices

To prepare for dealing with vulnerable adults at your firm AdvisorAssist recommends the best practices of:

• Train staff to prevent, detect, and respond to elder financial abuse by escalating any suspicious activity to the CCO.
• Harness technology such as suspicious activity monitoring technology to identify potential financial abuse.
• Collaborate with stakeholders like custodians, banks, and plan sponsors to identify potentially at-risk clients and trusted third parties acting for the client’s protection
• Document, validate and report suspicious activity to your state regulators or federal agencies.
• Offer clients the ability to have your firm notify a trusted third party when financial exploitation is suspected.
• Maintain awareness of any existing rules or changes at your state securities regulator regarding their adoption of rules regarding vulnerable adults.

^{1. See NASAA Members Adopt Model Act at: Link. ↩}

^{2. See FINRA Regulatory Notice 15-37, October 2015 at: Link. ↩}

^{3. See Testimony of Judith Shaw, NASAA President before the US Senate Special Committee on Aging at: Link. ↩}

AdvisorAssist News for RIAs is a series of articles that will help your firm understand and prepare for changes that may be occurring on the state or federal level. Our goal is to help you increase your confidence that your firm remains in compliance as well as provide some practical steps to help Chief Compliance Officers address this topic.

Contributors:

Brendan Furey
Michael Conlon

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Department of Labor Fiduciary Rule: Webinar Q&A

Last week, Advisors4Advisors (A4A) hosted a webinar on the DOL Fiduciary Rule change presented by members of the AdvisorAssist team. You must be a paying A4A member ($60 annually) to attend webinars, view replays, and receive CPA, CFP or IMCA CE credit. Click here for information on joining A4A, and Click here to access the webinar replay.

The following questions were raised after the webiar about the new DOL Fiduciary Rule. We cover the DOL Fiduciary Rule in more detail in a previous post

1. In RIA with Rollover, since AUM increases, but fees decrease or services increase then are you a conflict? Trusted advisor is increasing income, but client getting something for it.

A: This question seems to be asking when an Advisor is managing a client’s retirement plan assets and recommends a rollover to another vehicle, such as an IRA, since the Advisor’s assets under management (AUM) will increase but overall fees paid by the client will decrease, or services received by the client increase, then are you in a conflict? The Advisor’s compensation is increasing but the client getting something for it.

The recommendation of a rollover creates a potential for a conflict of interest. Therefore, the Advisor making the recommendation should document with the client why the rollover is in the client’s best interest. The fact that overall fees paid by the client will decrease, or services received by the client will increase with the rollover are good reason why the rollover is in the client’s best interest and therefore, should documented in the client’s profile and if it is not already in the client agreement, the client should receive notice that the Advisor is a fiduciary acting in the client’s best interest.

The definition goes on to explain what constitutes a “recommendation” and what may be excluded from that definition, such as providing certain services or information regarding the plan or IRA, such as marketing or making available to a plan fiduciary a platform or similar mechanism where the plan fiduciary may select or monitor investment alternatives; identifying investment alternatives that meet objective criteria specified by the plan fiduciary; providing objective financial data and comparisons with independent benchmarks to the plan fiduciary.

2. If an Advisor recommends that a client rollover from a 401(k), hence increasing the Advisor’s AUM and the client’s fees (regardless of investment), does not that create a conflict of interest?

A: Correct, the recommendation of a rollover creates a potential for a conflict of interest. Therefore the Advisor making the recommendation should document why the rollover is in the client’s best interest.

3. How do you get the expenses of the 401(k) that the employee was paying?

A: Clients should be able to produce documentation regarding the expenses that they are currently paying for their 401(k) plan. The Advisor will want to collect the current fee structure of their client’s 401(k) plan as a factor in making an informed recommendation about why any rollover from that plan is in the client’s best interest.

4. How do we get the expenses of the 401(k) to the client?

A: If you are trying to obtain information about a client’s 401(k) you should contact the plan sponsor. However, this question seems to be asking how do Advisors ensure they are not responsible for the expenses of a client’s 401(k).

Unless an Advisor is engaging clients in a “wrap fee” program, where the client pays a single advisory fee for the management and services of their account including custodian and brokerage fees, then the clients should be responsible for paying expenses related to the management of their account. Advisors should ensure that their client agreements and Form ADV Part 2A, Item 5(C) fully and accurately disclose which party is responsible for fees related to the account management.

Although an RIA may not be compensated by a commission or revenue sharing, Form ADV requires disclosure to clients regarding potential conflicts and compensation arrangements. Hybrid advisors receiving commission compensation will want to ensure they are satisfying the BICE. Therefore as a best practice we recommend that even firms without commission or revenue sharing fees should provide notice to retirement clients that they are providing their services in the client's best interest to uphold their fiduciary duty and review and update disclosures of any potential conflict of interest. This will ensure that you are availing your firm of the BICE and creating a presumption of compliance with the Rule.

5. If I'm an RIA and already a fiduciary, and serve ERISA qualified plans as a 3(21) advisor and 3(38) manager capacity, and already have level fees fully disclosed and transparent within Advisory Agreements. (408b2 compliant), how am I really impacted by the DOL Rule? The only thing I've read is needing to document rollovers if I will get compensated for the rollover into an IRA (versus keeping funds in a 401k Plan, for instance) - which I already do to some degree.

A: Correct. The ongoing receipt of a Level Fee such as a fixed percentage of the value of a customer’s assets under management, where such values are determined by readily available independent sources or independent valuations, typically would not raise prohibited transaction concerns for the Advisor.

Under these circumstances, the compensation amount depends solely on the value of the investments in a client account, and ordinarily the interests of the Advisor in making prudent investment recommendations, which could have an effect on compensation received, are aligned with the Retirement Investor’s interests in increasing and protecting account investments. However, there is a conflict of interest when an Advisor recommends that a participant roll money out of a plan into a fee-based account that will generate ongoing fees for the Advisor that he would not otherwise receive, even if the fees going-forward do not vary with the assets recommended or invested.

As stated in question 1, for a level fee fiduciary to recommend a rollover the Advisor should document information supporting the recommendation in the client’s profile. Additionally, if it is not already in the client agreement, the client should receive notice that the Advisor is a fiduciary acting in the client’s best interest. It is our view that this written notice can also be communicated to the client via Form ADV.

6. Are there any best practices yet regarding the type of disclosure of the compensation arrangement and conflicts of interest (slide 13) - which I already disclose in our Firm's ADV?

A: The best practices regarding disclosure of compensation arrangement and conflicts of interest will evolve as we get closer to the full implementation date of this rule, January 1, 2018. That being said, if you are not a level fee Advisor and seeking to make use of the Best Interest Contract Exemption you will want compensation arrangements and conflicts of interest disclosed in a separate Best Interest Contract or as an addition to existing agreements along with the other requirements of the Best Interest Contract Exemption.

Also in the preamble to the final rule, the Department of Labor recommended the creation of web disclosure, which they state should contain: A schedule of typical account or contract fees and service charges, and a list of product manufacturers with whom arrangements have been made to provide payments to the Advisor, including whether the arrangements impact Advisor compensation. The DOL also suggests disclosure of the business model and the Material Conflicts of Interest, including payout grids and non-cash compensation and rewards.

7. Not sure if you covered this.... what about my existing clients that generate trails?

A: At this time we do not believe that trail compensation from commission transactions based on prior recommendations would be relevant to the DOL Rule change. If it is in the client’s best interest to transition those assets to another vehicle, or if a new recommendation that would involve a commission trail should arise, those would be relevant to your compliance for your fiduciary duty and the DOL fiduciary rule, respectively.

8a. [Is there a] Conflict if [a] Fee Only RIA is NOT advisor to the qualified plan but solicits retiree to rollover to IRA? (the value added is RIA gives advise (sic) whereas existing qualified plan does not give that advice.

A: The recommendation of a rollover of retirement plan assets creates a potential for a conflict of interest. Therefore, the Advisor making the recommendation should document why the rollover is in the client’s best interest. Advisors should also be aware if any of their solicitors are making such recommendations and ensure they have documentation to support the recommendation. The statement that the IRA has more options available to it for investment, and therefore more opportunity for different strategies by means of advisory services from the RIA, can be given by the Advisor that the rollover may be in the client’s best interest given the full profile of the client.

8b. Does DOL recognize that distinction?

A: Yes. The DOL Fiduciary Rule would consider you to be a Level Fee Advisor.

8c. Am I giving client that disclosure or just adding to my ADV and client file?

A: Form ADV should be completely and accurately disclosing fees charged by the Advisor in Item 5, and any other compensation received in Item 14. Advisors are typically required to deliver Form ADV to all new clients, and existing clients annually or upon a material change. The DOL Fiduciary Rule would require full disclosure of all fees related to a client’s retirement plan assets when certain recommendations are made, such as a rollover.

9. Are [these] rules [applying] to discount brokers or robo advisors?

A: The DOL Fiduciary Rule applies to anyone making the recommendations to clients in qualified plans for a fee. ERISA contains an exemption to prohibited transactions in section 408(b)(14) that covers robo-advisors and is available for robo-advice involving prohibited transactions if its conditions are satisfied. However, robo-advisors that are Level Fee Fiduciaries may rely on the Best Interest Contract Exemption with respect to investment advice to engage the robo-advice provider for advisory or investment management services for Plan or IRA assets, provided they comply with the conditions applicable to Level Fee Fiduciaries, as discussed in question 1 above.

10a. Doesn't the rule impose a significant burden on the fee only RIA to know the fees charged in the 401(k)? Sometimes is it very hard to find this out fully. Clients don't always provide this information and it is not always correct.

A: The new rule sets forth a requirement for certain information when making a recommendation to Retirement Investors. It requires that the Advisor, when providing investment advice to the Retirement Investor, that at the time of the recommendation, such advice reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor. Therefore, we would recommend performing all the necessary due diligence, whether with the client or directly with the plan sponsor of the client’s 401(k) in order to substantiate the recommendation(s) made, including current fee structure on 401(k) plans affected by the advice.

10b. Since we have no access to the 401(k), how do you confirm the information?

A: As stated in question 10a above, due diligence requirements should include gathering information from all sources available including contacting the sponsor of the plan, if needed.

11a. What do you mean by "level fee" advisor?

A: Level fee advisors are those that meet the definition of a level fee fiduciary by receiving the same compensation regardless of the particular investments the client makes, whether based on a fixed percentage of assets under management or a fixed dollar fee.

The full definition of a Level Fee Fiduciary is located in Section VIII(h) of the Best Interest Contract Exemption Final Rule

11b. Are you talking about an AUM %? or something else?

A: An Advisor whose compensation is based on the client’s assets under management would be an example of a Level Fee Fiduciary for the purposes of the DOL Fiduciary Rule.

12. Does the ADV Part II provide adequate disclosure for fee only RIAs?

A: It is our view that this written disclosure can also be communicated to the client via Form ADV.

13. Would an RIA be considered a level fee fiduciary if they charge differently for equities/bonds/cash?

A: Based on the definition of Level Fee Fiduciary above that does not sound like it would meet the requirements for the purposes of the DOL Fiduciary Rule since the Advisor would receive different compensation depending on what investments were made.

Contributors:
Brendan Furey
Michael Conlon

Analyzing the Department of Labor Fiduciary Rule

The revised Department of Labor (DOL) fiduciary rule (Rule) was published in its final form in the Federal Register and can be accessed by clicking this link. Although effective starting June 7th, 2016 the DOL has granted time for affected service providers of retirement plans to adjust to fiduciary status and partial compliance is not required until April 10, 2017 with full compliance required by January 1, 2018.

The focus here is determining if fiduciary status applies to your firm based on the advice provided to retirement plans or participants, what exemptions may apply, and what steps must be taken to maintain compliance.

Definition of Fiduciary

Under the Rule a fiduciary will now include a person providing investment advice regarding money or property within the plan for a fee or other compensation, directly or indirectly, to a plan, plan participant or beneficiary, IRA or IRA owner. Investment advice relevant to this definition include the following:

1. A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;
2. A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made; and
3. The investment advice is made, directly or indirectly (through an affiliate), by a person who:
1. Represents or acknowledges that it is acting as a fiduciary within the meaning of the ERISA or the IRS Code;
2. Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular needs of the advice recipient; or
3. Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

The definition goes on to explain what constitutes a “recommendation” and what may be excluded from that definition, such as providing certain services or information regarding the plan or IRA, such as marketing or making available to a plan fiduciary a platform or similar mechanism where the plan fiduciary may select or monitor investment alternatives; identifying investment alternatives that meet objective criteria specified by the plan fiduciary; providing objective financial data and comparisons with independent benchmarks to the plan fiduciary.

The definition also clarifies that an advisor is not a fiduciary when providing advice to an independent person who is a fiduciary of a plan or IRA, if that fiduciary is a bank, insurance carrier, registered investment adviser, broker-dealer, or other person that holds or has assets under management of at least $50 million. This means the old definition has been expanded to focus on advice given to IRA owners and people rolling over their employer sponsored plan (e.g., 401(k) account) into an IRA. Finally, education and general marketing materials that a reasonable person would not view as investment recommendations are not included in the definition of retirement investment advice, so advisors may continue to provide general materials on retirement saving without triggering fiduciary duties.

As a fiduciary, an advisor must adhere to a “best interest” standard for a client, rather than a “suitability” standard for an investment product. Therefore, an advisor cannot receive fees that could be seen as creating conflicts of interest (i.e. commission or revenue-sharing), unless a qualified exemption applies.

Best Interest Contract Exemption (BICE) and Impartial Conduct Standards

This exemption, published at this link, provides relief for compensation, such as commissions and revenue sharing, that an advisor and the advisor’s employing firm might receive in connection with investment advice to retail retirement investors. The BICE requires financial institutions and advisors to acknowledge fiduciary status for itself and its advisors, adhere to basic standards of impartial conduct by giving prudent advice in the client’s best interest, avoid misleading statements, and receive only reasonable compensation. Additionally, financial institutions must adopt policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, disclose basic information about their conflicts of interest and the cost of their advice. Level Fee fiduciaries are subject to more streamlined conditions.

Principal Transactions Exemption

The other main exemption from the Rule is the Principal Transactions Exemption, published at this link, which permits advisors to sell or purchase certain debt securities and other investments out of their own inventories to or from plans and IRA owners. The exemption applies even though this transaction results in payment to the advisor. However, similar to the BIC exemption, the advisor must adhere to Impartial Conduct Standards and disclose to the client any conflicts of interest in order to make use of the exemption.

How should a Chief Compliance Officer respond to the Rule?

In all cases, the advisor will want to retain documentation of compliance with this new rule, including contracts, policies, procedures, and disclosures, to support your Books & Record requirements. However, there are no additional record retention requirements for detailed data on inflows, outflows, holdings, and returns for retirement plan or IRA clients.

Chief Compliance Officers should review the information in their Form ADV Part 2A and client agreements to determine whether or not they are acting as a fiduciary based on the recommendations provided to clients regarding retirement plans, participants, beneficiaries or IRAs, and ensuring that their client agreements and ADV contains all disclosures required by the Rule regarding conflicts of interest and compensation arrangements, including a statement as to whether or not they are a fiduciary.

Although an RIA may not be compensated by a commission or revenue sharing, Form ADV requires disclosure to clients regarding potential conflicts and compensation arrangements. Hybrid advisors receiving commission compensation will want to ensure they are satisfying the BICE. Therefore as a best practice we recommend that even firms without commission or revenue sharing fees should provide notice to retirement clients that they are providing their services in the client's best interest to uphold their fiduciary duty and review and update disclosures of any potential conflict of interest. This will ensure that you are availing your firm of the BICE and creating a presumption of compliance with the Rule.

Contributors:
Brendan Furey
Michael Conlon

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CCO Series: Top Regulatory Deficiencies for RIAs -- Books and Records

What you need to know

Registered investment advisors are required to maintain and preserve books and records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment advisor.¹ We cover books and records compliance in more detail in a previous post.
Annually, the North American Securities Administrators Association (“NASAA”) issues a report about common deficiencies found in state coordinated investment adviser examinations.² The most common books and records deficiencies described by NASAA are lack of documentation of “recommendations made or proposed and any advice given or proposed,”³ which will include 1) the advisor’s analysis of client suitability for an investment product and 2) when acting as a fiduciary why the advice is the client’s “best interest”.

Common Deficiency: Client Suitability Records

Examiners noted the lack of documentation about the suitability of an investment product and lack of documentation that the advice is the client’s “best interest”. The mantra of an examiner is that if it is not documented then it was not done. Since July of 2012 when the FINRA suitability obligations went into effect,⁴ a major focus of the examiner’s books and records review has been on whether suitability is being properly documented in the client profile.

Common Deficiency: Focus on Fiduciaries

In addition, with the new Department of Labor fiduciary rule being published on April 8th, and effective in April 2017, examiners will be focused on reviewing suitability and “best interest” documentation. With the new fiduciary rule advisors serving clients in qualified retirement plans and IRAs will need to document how the advice is in the client’s “best interest” similar to other ERISA clients. Also, in certain cases the advisor’s client agreement may need to satisfy a Best Interest Contract Exemption pursuant to the new rule.

How do we avoid these deficiencies?

To avoid these deficiencies at your firm AdvisorAssist recommends the best practices of:

• Perform an annual review of the advisor’s books and records archive to ensure you are keeping the required documentation for the required duration.
• Preparing and maintaining a comprehensive profile on each client. This profile should be created during the onboarding of the client, confirmed with the client annually and updated as any new accounts or new information is received from the client.
• Ensure your books and records contains all necessary backup documentation in addition to the client profile as needed to support your investment recommendations or advice.
• Create and maintain Best Interest Contracts as needed for DOL-regulated transactions involving retirement plans.
• Document in the client profile why advice regarding rollovers and other major transactions are in client’s best interest. Stay up to date with Fiduciary Rule Changes by clicking this link.

<sup>1. See 17 CFR §275.204-2(e)(1). Link. ↩
2. See North American Securities Administrators Association, “2015 Investment Adviser Coordinated Exams,”. Link. ↩
3. See 17 CFR §275.204-2(a)(7). Link. ↩
4. See FINRA Regulatory Notice 11-02. Link. ↩</sup>

AdvisorAssist’s CCO Series: Regulatory Deficiencies for RIAs is a series of articles that will help your firm understand and avoid the most common compliance deficiencies found by regulators. Our goal is to help you increase your confidence that your firm remains “exam ready” as well as some practical steps to help Chief Compliance Officers address this topic.
Contributors:
Brendan Furey
Michael Conlon

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Department of Labor's Fiduciary Rule Change

The long-anticipated “fiduciary rule” update from the Department of Labor has been issued. AdvisorAssist is reviewing the contents of the rule change to determine what compliance impact it would have to our clients, if any.
As the effective date for the rule’s applicability is no earlier than April 2017 we are taking the time to thoroughly and completely analyze the rule change to ensure further guidance is complete and accurate.
The rule change was published on the Federal Register detailing these final rules from the Department of Labor is available here. &nbsp&nbsp&nbspA summary of the rule change starts on page 8.
Stay tuned for additional information as we get closer to April 2017 and January 1, 2018 implementation dates.
Contributors:
Brendan Furey
Michael Conlon

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FINRA proposes to require Brokers to Disclose Bonuses

In FINRA's continued quest for a role in the RIA segment, their 20-member board of governors voted on 12/10/12 to propose a rule that would require a registered representative that switches firms to disclose any compensation, bonus or other incentive received in the recruitment process.

This is important for the fiduciary movement, but is likely to result in continued departures from the brokerage firms. We expect significant pushback from member firms. RIAs must disclose the nature of ANY conflict of interest, including, but not limited to compensation from 3rd parties. However, they do not need to state specific dollar amounts. They are required to state the source and nature of any conflict and how they mitigate such conflict.

Financial Advisor magazine has good coverage on this topic (http://www.fa-mag.com/news/-brokers-must-disclose-bonuses-to-clients-in-finra-proposal-12791.html?section=43)

Opening the door to this disclosure will certainly change the recruitment dynamics and forge a path to disclosure of other perks. We'll continue to keep you apprised on this proposal. Please share any thoughts or questions.

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