Top RIA Compliance News Articles for the Week of May 28, 2016

1. Two Sides of the DOL Fiduciary Rule’s ‘Best Interest Contract Exemption’ Advisers Must Understand (Author- Greg Iacurci, InvestmentNews)

The Best Interest Contract Exemption (BICE) is a key component of the Department of Labor (DOL) fiduciary rule. In this piece, Greg lacurci thoughtfully describes the differences between the “BICE” and “BICE Lite.” Compared to the much more onerous requirements of the BICE, the BICE Lite is a “streamlined” exemption for level-fee fiduciaries that is reserved for advisors that act as a fiduciary and charge a level fee (e.g. 1% of assets under management) regardless of the specific investment recommendation which is made. With the BICE Lite, an advisor must 1) provide a written statement of fiduciary status to the client, 2) comply with impartial conduct standards, and 3) keep written documentation as to why the specific recommendation is best for the client. However, as Jason Roberts of the Pension Resource Institute notes, the BICE Lite exemption is very narrow and specific as “to be considered a level-fee fiduciary under BICE Lite, the fee must be level not just for the adviser, but the supervising firm and their affiliates as well.” Ultimately, it’s likely that many fee-only RIA firms may be able to take advantage of the BICE Lite particularly as it relates to providing IRA rollover recommendations so this is definitely a worthwhile read and a topic to continue to follow closely.

2. The Biggest Cyberthreats RIAs Face (Author- Bryan Baas, InvestmentNews)

According to Bryan Baas, managing director of risk oversight and control at TD Ameritrade Institutional, an estimated 95% of cyber breaches take place due to human error. For example, this could be sending personal information in an unsecure Wi-Fi network or mistakenly sending money to a “client” due to a false email. In addition, hacked client email accounts are one of the biggest cyber threats for RIA firms.The attackers can pose as the client and trick advisors into performing cash transfers. As Baas writes, “if you take action based on email instruction alone, please stop.” The best way to prevent this from happening is to always pick up the telephone and call the client to verify they requested a payment. Having a cybersecurity plan, a documented response plan, and training employees to practice cyber threat precautions are all ways firms can decrease their risks of becoming a victim to a cyber attack.

3. SEC Names Hetner to New Senior Cybersecurity Post (Author- Melanie Waddell, ThinkAdvisor)

On Thursday, Christopher R. Hetner was named senior advisor to the chair for cybersecurity policy for the Securities and Exchange Commission (SEC). Hetner has over 20 years of experience in information security and technology. His past experience includes holding positions at Ernst and Young, GE Capital, and implementing programs designed toward information security and regulatory compliance for Citigroup’s Institutional Client Group. Hetner will serve as a senior advisor to SEC Chairwoman Mary Jo White on all cybersecurity policy matters. With the creation of this new position, it’s further proof the SEC remains very focused on RIA cybersecurity risks.

4. The DOL Fiduciary Rule: An Opportunity to Reevaluate Your Succession Plan (Author- Matt Matrisian, Wealth Management)

As author Matt Matrisian of AssetMark highlights, the DOL fiduciary rule may lead to many advisors transitioning from commission-based products to fee-based advice. This transition also creates a great opportunity for an advisor to spend time developing a succession plan. Matrisian further writes that, “DOL rule or no DOL rule, at the absolute minimum, an advisor should establish a continuity agreement with another advisor, which ensures that both advisors’ firms will continue on in the event of a death or medical emergency.” As RIA compliance consultants, we too find that many investment advisory firms have yet to even establish the most basic succession plan. Establishing such a plan is not only an important compliance obligation, but also a sound business practice. Be sure to check out this article for more tips on establishing a more formal succession plan to prepare for an eventual sale or internal succession.

5. Lawsuit Argues DOL Overstepped With Fiduciary Rule (Author- Diana Britton, Wealth Management)

This week, a group of nine plaintiffs led by the Securities Industry and Financial Markets Association (SIFMA), the Financial Services Institute, and the United States Chamber of Commerce, filed a lawsuit challenging the validity of the new DOL fiduciary rule. As Diana Britton notes, “the suit argues that the agency overstepped its boundaries and that the Securities and Exchange Commission is the agency with jurisdiction to develop a uniform fiduciary standard of care. It also alleges the rule violates the First Amendment right to free speech.”  Labor Secretary Thomas Perez has previously stated that he believes the new rule can withstand any legal challenge. This will be an interesting development to follow in the coming months, but as it stands now, most industry observers seem to believe the legal challenge is unlikely to be successful although it is possible it could delay the potential implementation date.

Don’t forget to check out last week’s top RIA compliance news articles on proper Form U4 disclosures and compliance issues related to elder abuse. Be sure to check back next Friday for next week’s top articles!