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DOL Releases First FAQs for New Fiduciary Rule

dol fiduciary rule

The Department of Labor (“DOL”) has released 34 FAQs providing additional guidance related to its final rule expanding the definition of an investment advice fiduciary.

On October 27, 2016, the DOL released FAQs related to prohibited transactions exemptions issued or revised corollary to the final rule.  The FAQs also include a discussion of the circumstances under which a fiduciary may be required to provide an exemption. The DOL also reiterated that it would not extend the rule implementation’s effective date (April 10, 2017), citing that it would be adequate time for retirement products and service providers to comply with the new requirements.  The DOL also noted that initially, its focus would be to provide compliance assistance in support of the diligent and good faith efforts of financial advisory fiduciaries to comply with the new rules rather than citing violating and imposing penalties.

Providers of fiduciary investment advice to plan sponsors plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without complying with the protective conditions in a prohibited transaction exemption (a “PTE”). The Best Interest Contract Exemption (the “BIC Exemption”) ensures that retirement investors receive advice that is in their best interest while also allowing advisers and their financial institutions to continue receiving compensation that would otherwise be prohibited under the rule- such as commissions, 12b-1 fees, and revenue sharing.

A summary of each FAQ is below.

FAQ 1: Financial institutions must provide notice to retirement investors that define their fiduciary status and describe their material conflicts of interest, as well as designate a person responsible for addressing material conflicts of interest and monitoring adherence to impartial conduct standards.  These standards require that fiduciaries give advice that is in the best interest of the retirement investor, receive compensation that is reasonable, and make no misleading statements.

FAQ 2: The new restrictions on the availability of PTEs are effective April 10, 2017.

FAQ 3: The BIC Exemption is intended to be broadly available for advisers and financial institutions that provide investment advice to retail investors such as plan participants beneficiaries and IRA owners.  It is intended to serve as the primary exemption for investment advice transactions.

FAQ 4: Merely executing transactions at the customer’s direction does not make an individual or firm an investment advice fiduciary.

FAQ 5: Charging a fee based on a fixed percentage of assets under management (“AUM”) does not, in and of itself, raise prohibited transaction concerns or require a fiduciary to comply with a PTE.  However, this kind of compensation can raise concerns about conflict of interest. For example, investment advice to switch from a commission-based account to an account that charges a fixed percentage of AUM on an ongoing basis could be a prohibited transaction.

FAQ 6: The BIC Exemption is available to a discretionary fiduciary who advises a client to roll over their retirement account as long as the adviser does not have or exercise any discretionary authority or control with respect to the decision to roll over the account and conditions of the exemption are met.

FAQ 7: The BIC Exemption is also available to a discretionary fiduciary who advises a client to roll over a plan account into an IRA as long as the fiduciary does not exercise any discretionary authority or control with respect to the decision to roll over assets.

FAQ 8: The BIC Exemption does not provide relief for a recommended transaction if the adviser has or exercises any discretionary authority or control with respect to the transaction.

FAQ 9: Financial institutions must take special care in developing and monitoring compensation systems to ensure that they do not run counter to the fundamental obligation to provide advice that is in the customer’s best interest.

FAQ 10: The full BIC Exemption does not cover advice provided solely through an interactive website in which computer models or software provide recommendations based on personal information that the investor provides without any personal interact or advice from an individual adviser (i.e. robo-advice).

FAQ 11: BIC Exemption does not prohibit a financial institution or adviser from discounting prices paid by customers for services.

FAQ 12:  Signing and front-end awards and bonuses are permissible under the full BIC Exemption so long as they are not tied to the movement of accounts or assets or on achievement of particular asset or sales targets.  On the other hand, back-end awards are generally prohibited under the full BIC Exemption because they create significant conflicts of interest that are intended or would reasonably be expected to cause advisers to make recommendations that are not in the best interest of the retirement investor.

FAQ 13: A level fee is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended.  Clear and substantial conflicts of interest arise where a level fee fiduciary recommends that (1) a participant roll money out of a plan and into a fee-based account that will generate ongoing fees for the adviser even if the fees don’t vary based on assets recommended or invested and (2) a client switch from a commission-based account to an account that charges a fixed percentage of assets under management on an ongoing basis.  The BIC Exemption would allow level fee fiduciaries to receive level fees so long as they disclose the fee in advance, satisfy the impartial conduct standards, and document reasons why the advice is in the best interest of the client.  In the alternative, the fiduciary may execute a Best Interest Contract with the client.

FAQ 14: When providing investment advice to roll over assets from an ERISA plan to an IRA, the fiduciary must conduct proper due diligence of the investor’s existing plan in order to determine if the rollover is in the best interests of the client.  Where information is limited, or the investor is unwilling to provide the information, the adviser must rely on alternative data and explain its limitations.

FAQ 15: An adviser or financial institution may provide both level fee and commission-based advisory services.

FAQ 16: An adviser or financial institution can rely on the level fee provisions in the BIC Exemption even if they become a discretionary manager of the client’s IRA assets after the rollover.

FAQ 17: The BIC Exemption’s relief for level fee fiduciaries includes relief for a recommendation to transfer from a commission-based account to a fee-based account.  See FAQ 13 for requirements for relief.

FAQ 18: If an adviser or financial institution recommends products that generate third party payments, they will need to comply with the more stringent provisions of the full BIC Exemption to safeguard the investor from biased advice.

FAQ 19: If an adviser or financial institution is going to recommend only proprietary products, they will need to comply with the more stringent provisions of the full BIC Exemption and adhere to the best interest standard.

FAQ 20: Bank Networking Arrangements under the BIC Exemption is only applicable to non-affiliates.  Recommending others to provide investment advice constitutes fiduciary investment advice and receipt of compensation for rendering such advice is a prohibited transaction. However, such compensation is not prohibited where investment advice is provided in relation to the sale of annuities.

FAQ 21: Insurance-only agents can continue to sell fixed-rate and fixed-indexed annuities to retirement investors after the rule goes into effect.

FAQ 22: The DOL’s exemptions for annuity sales do not require insurance companies to use any particular distribution channel.

FAQ 23: Insurance intermediaries such as independent marketing organizations (“IMOs”) can continue to distribute the products of an insurance company through independent insurance agents after the applicability date of the Rule. An IMO can receive compensation as a result of an annuity purchase recommended by an insurance agent pursuant to either PTE 84-24 or the full BIC Exemption.

FAQ 24: After January 1, 2018, financial institutions will be required to maintain an electronic copy of the required best interest contract with its clients on its web site, which must be accessible to the retirement investor.

FAQ 25: The BIC Exemption allows for financial institutions to amend existing contracts with investors to add the best interest contract provisions required by the exemption by using the negative consent procedure.

FAQ 26: Transaction disclosures are required to be made only for purchase recommendations.

FAQ 27: Specific disclosure of costs, fees or other transactions should generally be provided as of the date of the recommendation.  If the request for disclosure is made after the transaction, then the information must be provided within 30 days after the request.

FAQ 28: Dividend reinvestment programs are “systematic purchase programs” eligible for grandfathering relief under the BIC Exemption. The exemption is available for advice to continue to adhere to the program but does not extend to investment advice to make changes to the program.

FAQ 29: Investment of additional amounts in a previously acquired investment vehicle is subject to the rule and is not eligible for grandfathering relief.

FAQ 30: Compensation received as a result of investment advice to sell a grandfathered investment is covered by the BIC Exemption.

FAQ 31: The Principal Transactions Exemption contemplates a process by which financial advisers can receive individual exemptions.

FAQ 32: PTE 84-24 (insurance agent’s receipt of commission from an insurance company) covers rollovers into an annuity.

FAQ 33: Reasonable compensation standard described in PTE 84-24 and the BIC Exemption, though worded differently, will be interpreted the same way.

FAQ 34:  Compliance assistance is a high priority for the DOL and will be its focus after the initial implementation of the new rule and exemptions.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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