ROBS and DoL Fiduciary Rule

[Soundbc1]

Just musing before going in to a meeting.

Under the new DoL Fiduciary rules, wouldn't a promoter of a ROBS plan become a fiduciary under the new rules?  They are being paid a fee and recommending the client move funds from and IRA to a qualified plan for the purpose of purchasing employer stock.

I got to go.

 

 

[MoJo]

IMHO, absolutely....

[david rigby]

Could it depend on the definition of "promoter"?

[MoJo]

34 minutes ago, david rigby said:

Could it depend on the definition of "promoter"?

Yes, but one who "promotes" a concept and "advises" the participant to "use" plan assets for an investment in the concept, then I think they are a fiduciary.

[Peter Gulia]

To spark some further discussion, let’s imagine one can prove that the “ROBS” service provider was both an IRC § 4975(e)(3)(B) fiduciary of the rolled-away Individual Retirement Account and an ERISA § 3(21)(A)(ii) investment-advice fiduciary of the retirement plan that bought employer securities.

But even if one can prove that the “ROBS” service provider was such a fiduciary, what remedy does that set up?

 

[MoJo]

29 minutes ago, Fiduciary Guidance Counsel said:

To spark some further discussion, let’s imagine one can prove that the “ROBS” service provider was both an IRC § 4975(e)(3)(B) fiduciary of the rolled-away Individual Retirement Account and an ERISA § 3(21)(A)(ii) investment-advice fiduciary of the retirement plan that bought employer securities.

But even if one can prove that the “ROBS” service provider was such a fiduciary, what remedy does that set up?

 

The standard remedies if and when a breach of fiduciary obligations occurs.  I would think the "test case" would be when the business fails and the plan holding the failed company stock loses value, you'd have an argument of imprudence, and related issues.

Which, by the way, is a long row to hoe before 1) any liability is found; 2) determining what, if any damages occurred; and 3) collecting anything from the fiduciary/promoter.

Just my "opinion" here, but I've never liked the ROBS concept.  Failure rates of startups are astronomical and as things stand now, retirement assets (in a plan and in some case in an IRA) are exempt from attachment by creditors.  Why would one take a crap shoot using unattachable assets in bankruptcy by making those unattachable assets fully attachable as the vehicle in which business assets (attachable) are purchased?

[austin3515]

They're not getting paid for investment advice in my opinion.  They are getting paid for compliance services.  I don't think it would make them a fiduciary any more than if an ERISA Attorney advised them regarding the transaction.

[Peter Gulia]

From sales materials and implementation kits I’ve seen from the transactions I’ve undone, it seems those “ROBS” service providers are somewhat careful about describing how a retirement plan may buy employer securities, and don’t say that any particular business is a good investment.

 

So reality might be closer to austin3515’s observation.  That frame might suggest another of the available remedies:

 

A nonlawyer is liable if his, her, or its “client” suffered harm because the “client” relied on the nonlawyer’s inappropriate advice.  Courts have not hesitated to impose liability on a nonlawyer for giving incorrect, or even incomplete, advice.  A nonlawyer is held to at least the same standard of care and expertise as a competent lawyer.

 

And at least one court decision suggests a nonlawyer’s standard of care “should be no less than that required of a licensed attorney, and conceivably even a higher standard would be appropriate – strict liability, for example, to deter those who might be otherwise tempted to profess a competence they have no right to claim.”  Wright v. Langdon, 274 Ark. 258, 623 S.W.2d 823, 826 (1981).  In other contexts, doing without a license an activity that lawfully is done only by those with the license is presumed hazardous.  So a court might treat a nonlawyer’s unlicensed practice of law as negligence per se to result in strict liability.

 

As MoJo suggests, stating and proving a claim is hard work.

 

[austin3515]

Well, you're coming close to suggesting that because I didn't go to law school I should handle pre-approved prototype documents, which at times requires quite a bit of skill and expertise even if I did not write the document for start to finish (frankly, neither do the attorneys--they almost always start with a template).  Believe me I wouldn't touch a ROBS with a 10 foot pole, I'm just not sure it's that much further down the road I drive on every day...

[Peter Gulia]

No, I'm suggesting that one wishes the "ROBS" providers put into their service the kinds and degrees of quality controls and caring I believe austin3515 puts into his or her services.

What matters is not the attorney-at-law or CPA designation or license, or even the education leading to it; what matters is a sincere recognition that a client or a service recipient relies on our communications.

 

[ESOP Guy]

18 hours ago, austin3515 said:

Well, you're coming close to suggesting that because I didn't go to law school I should handle pre-approved prototype documents, which at times requires quite a bit of skill and expertise even if I did not write the document for start to finish (frankly, neither do the attorneys--they almost always start with a template).  Believe me I wouldn't touch a ROBS with a 10 foot pole, I'm just not sure it's that much further down the road I drive on every day...

Although I do recall in the '80s the legal profession did try and go after the CPAs for practicing law without a license about their tax practices.  Had the lawyers won that my guess Austin couldn't prepare prototypes.  I also know a few lawyers that don't think a non-lawyer is qualified to complete the prototype check list. 

[Peter Gulia]

I remember the Florida Bar’s request that Florida’s Supreme Court approve a proposed advisory opinion.  Through trade associations, I participated in several opposition briefs.  One of our arguments became the court’s reasoning.  The court refused, completely, to approve the proposed opinion, and even to publish a revised line-drawing.  The Florida Bar re Advisory Opinion – Nonlawyer Preparation of Pension Plans, 571 So.2d 430 (Fla. Nov. 29, 1990).

 

If anyone is wondering, I have for many years held (and published) my view that anyone should be free to provide legal advice, and whoever provides advice should be responsible for it.

 

[MoJo]

10 hours ago, ESOP Guy said:

Although I do recall in the '80s the legal profession did try and go after the CPAs for practicing law without a license about their tax practices.  Had the lawyers won that my guess austin couldn't prepare prototypes.  I also know a few lawyers that don't think a non-lawyer is qualified to complete the prototyape check list. 

They did.  The primary case was in Florida where the Florida bar alleged that Mercer ((then known as Mercer Miedinger Hanson) was engaged in the unauthorized practice of law by drafting documents and consulting on plan design issues ("tax practice" as alleged by the Florida bar).  My ex worked for Mercer at the time (not in Florida, but...).  They picked the wrong defendant.  Mercer had the resources to vigorously defend and won in court, and won rather broadly.  Document drafting is "ministerial" in nature given the tight parameters imposed by law and regs, and plan design is more "consulting" rather than tax planning advice.

Others questioned the ability of non-lawyers to do document/design work, but I'm not aware of any challenges after the Florida decision.

Oh, and back to the OP topic - I'm sure ROBS promoters have been looking at the fiduciary implications of their business (if they are smart), but I have seen some of the promotional materials and other documentation from one such promoter (a former colleague did this to start a "junk hauling" business that they are attempting to franchise out) and it CLEARLY (in my mind) was over the line.  The materials talked about the '"average" rates of returns on typical plan/IRA investments and the "potential" returns by "investing in yourself" and your business idea. They had all sort of disclaimers in footnotes, but I consider that investment advice - not simply promoting their "compliance" services for one who had decided to do it.

[austin3515]

Yes but they are not recommending a particular security in my opinion.  The client is independently choosing the security.  The ROBS people are recommending a vehicle.  I just don't see it.

[MoJo]

36 minutes ago, austin3515 said:

Yes but they are not recommending a particular security in my opinion.  The client is independently choosing the security.  The ROBS people are recommending a vehicle.  I just don't see it.

The ROBS people are recommending taking a distribution from either a plan or an IRS - which under the new fiduciary rule IS an investment recommendation to SELL whatever it is invested in in the plan or IRA.

Under the new rule, that makes them a fiduciary, IMHO.... It does not require a recommendation of a specific new investment.

[austin3515]

So if I recommend to my friend to close his account to any old IRA am I a fiduciary?  I am not getting paid in any way shape or form as a direct result of that rollover.  Neither is a ROBS developer when the participant acts on their rollover decision.  The ROBS developer is getting paid for compliance services - NOT investment services.  I just cant understand how someone who is not making ANY investment recommendations could possibly be a fiduciary under these rules.  I assume no one here thinks the ROBS design people are recommending the particular security being invested in??

[RatherBeGolfing]

19 minutes ago, austin3515 said:

So if I recommend to my friend to close his account to any old IRA am I a fiduciary?  I am not getting paid in any way shape or form as a direct result of that rollover.  Neither is a ROBS developer when the participant acts on their rollover decision.  The ROBS developer is getting paid for compliance services - NOT investment services.  I just cant understand how someone who is not making ANY investment recommendations could possibly be a fiduciary under these rules.  I assume no one here thinks the ROBS design people are recommending the particular security being invested in??

Is the ROBS itself not an investment?  Is the ROBS not expected to pay off as an investment in your franchise or business? 

If it isn't, how can we justify putting investable plan assets at risk?

[austin3515]

I agree that if the security selected, monitored and purchased by the PARTICIPANT makes money, then yes it is an investment.  The more I think about it, I don't think the provider is making a recommendation.  The client wants to start a business and the client wants to invest his retirement assets in the business through a ROBS.  The ROBS person merely helps with the paperwok in a ministerial way.  If they were receiving a commission for the amount of the sale, or charging a fee to advise regarding whether or not the investment was sound, or whether or not they should continue to hold it or sell it to another party, then ok maybe.  But that is just not their role... They are not providing investment advice.  Doesn't there have to be investment advice to be a fiduciary.  Come to think of it, why wouldn't I be a fiduciary for designing a 401k plan?  How am I any different?  I am merely putting together legal documents to allow someone to establish a particular vehicle inside which to make an investment of their own choosing.  Same exact thing the ROBS people are doing.  My client might even roll an old balance into the Plan because I may have mentioned he might get better pricing.  A fiduciary I am not.

[MoJo]

56 minutes ago, austin3515 said:

So if I recommend to my friend to close his account to any old IRA am I a fiduciary?  I am not getting paid in any way shape or form as a direct result of that rollover.  Neither is a ROBS developer when the participant acts on their rollover decision.  The ROBS developer is getting paid for compliance services - NOT investment services.  I just cant understand how someone who is not making ANY investment recommendations could possibly be a fiduciary under these rules.  I assume no one here thinks the ROBS design people are recommending the particular security being invested in??

Austin:  Read the rule - it lays out the requirements to be a fiduciary. It can be complex, but it's been being discussed for about 7 years now - no lack of information out there about it.

And it is possible that if you recommend to a friend that they sell investments and close an account, you could (if you meet the few other requirements) be a fiduciary.

Seyfarth Shaw's summary is (emphasis mine):

The general rule is that a person is a fiduciary if the person provides recommendations or advice for a fee (MoJo comment - whether direct or indirect!) regarding:

• the advisability of acquiring, holding, disposing or exchanging plan or IRA assets.  This includes a recommendation as to taking a distribution from a plan or making a rollover to an IRA;
   
• the management of such assets, including assets rolled over or otherwise distributed from a plan or IRA to another plan or an IRA; or
   
• an appraisal, fairness or similar statement, verbal or written, with respect to the value of such assets in regard to a specific transaction(s) involving the acquisition, disposition or exchange of such assets by the plan or IRA;

Another good summary is here:  https://www.whitecase.com/publications/alert/dol-issues-final-fiduciary-rule-defining-investment-advice-under-erisa-and-code

And another (attached as a pdf)

And of course, the source:  https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2

As I said in a previous post, the ROBS promoters I've seen actually do "promote" the use of plan/IRA money - which is a recommendation to sell.

My employer has spend 3 years and MILLIONS of dollars to ensure we are in the right place.  In some instances, we have morphed to ensure we aren't a fiduciary (and to ensure the advisors who bring us business are paid a "fee" instead of a "commission" to meet certain exemptions for them and us), and in others, we have chosen specifically to be a fiduciary.  Case in point - our outbound call center - where we deal with large balance vested terms and ask if we can help them establish an IRA for a rollover of plan balances.  WE MAKE NO SPECIFIC INVESTMENT RECOMMENDATIONS.  WE CHARGE NO FEE FOR THAT SERVICE (but indirectly will make money off of an IRA we open).  Both internally, and Groom law have concluded that makes us a fiduciary - so we accepted that are are now a fiduciary with respect to that activity (and FINRA licensed all those reps to better be in compliance).  Schwab (a former employer) took the other approach and disbanded their outbound efforts to capture rollovers (and rumor has it, shopped around to sell their retirement services business - because they are in the game for the rollovers).

'nuff said.

Whos-a-Fiduciary-Now.pdf

[austin3515]

There is no fee for investment advice here.  That's my point

[MoJo]

On 6/9/2017 at 8:56 PM, austin3515 said:

There is no fee for investment advice here.  That's my point

"Direct or indirect...".  The ROBS promoter INDIRECTLY benefits from the sale of investments in the IRA/plan and therefore INDIRECTLY benefits from that investment action.  EXACTLY the same as my employer opening an IRA without giving investment advice - WE BENEFIT FROM THE OPENING OF THE ACCOUNT - not through investment advice.

Read the rule....

[austin3515]

If the ROBS promoter is a fiduciary for providing compliance services to the ROBS sponsor, then you would have to agree that I am a fiduciary for facilitating setting up a 401k plan.

But I am know that I am  not a fiduciary.  But now we're going around in circles (probably more than 50% my own fault :)) so I anticipate this being my last post on this topic.

[MoJo]

56 minutes ago, austin3515 said:

If the ROBS promoter is a fiduciary for providing compliance services to the ROBS sponsor, then you would have to agree that I am a fiduciary for facilitating setting up a 401k plan.

But I am know that I am  not a fiduciary.  But now we're going around in circles (probably more than 50% my own fault :)) so I anticipate this being my last post on this topic.

Austin READ THE F'**** RULE.  You are hung up on the fiction that a ROBS promoter isn't promoting the USE of IRA/plan assets for the purpose of funding a new venture - THAT MEANS that they are promoting the sale of assets in the IRA/plan in order to do so.  The DOL has REDEFINED "fiduciary" to mean just that - advising one take money OUT OF an IRA/plan - regardless of where it goes - even if it goes into another plan.  That necessitates "liquidating" those assets, and that is NOW considered fiduciary investment advice.  As long as they INDIRECTLY get a benefit (money) from recommending that transaction, they are a FIDUCIARY - even if the moneyh they get isn't from the investment, but rather from ministerial services in handling the transaction/compliance.

You are NOT a fiduciary unless you are advising people to move money (and I hope you aren't) from and IRA or plan to another one.  Setting up a 401(k) plan doesn't involve you making any kind of guidance/recommendation/advice on taking money from another IRA/plan to "seed" the new plan.  There is a difference! Read the material I cited above.  This has been discussed ad nauseum for years.....

 

[austin3515]

2 minutes ago, MoJo said:

Austin READ THE F'**** RULE.

If this was an anonymous post I'd still know who wrote it

[MoJo]

Just now, austin3515 said:

If this was an anonymous post I'd still know who wrote it

Don't know how many times I have to say it before you do it....  I even gave you the link....