Dept. Of Labor Answers Questions About Fiduciary Rule

Dept. Of Labor Answers Questions About Fiduciary Rule

The department has issued its first FAQ to clarify what’s at stake under the new regulation.

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Reviewed by: Cinthia Murphy
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Edited by: Cinthia Murphy

The Department of Labor has issued the first of what's expected to be a series of "Frequently Asked Questions" about the new fiduciary rule for retirement investment advice taking effect January 2018.

The first round includes 34 questions divided into 10 categories, in a document that runs 24 pages long in an attempt to provide advisors more clarity as to what a fiduciary standard will mean for their practices.

Below are the questions addressed in this FAQ:

Compliance Dates

Q1. When do firms and their advisers have to comply with the conditions of the new BIC Exemption and Principal Transactions Exemption?

Q2. When do firms and their advisers have to comply with the new conditions in preexisting exemptions that were amended in connection with the Rule?

Best Interest Contract Exemption – General Questions

Q3. Is the BIC Exemption broadly available for recommendations on all categories of assets in the retail advice market, as well as advice on rolling assets into an IRA or hiring an adviser?

Q4. Is compliance with the BIC Exemption required as a condition of executing a transaction, such as a rollover, at the direction of a client in the absence of an investment recommendation?

Q5. If an adviser and firm are compensated solely on the basis of a fixed percentage of assets under management, do they need to rely on an exemption, such as the BIC Exemption, to avoid committing a non-exempt prohibited transaction?

Q6. Is the BIC Exemption available for advisers who act as discretionary fiduciaries to retirement plans and then provide investment advice to a participant to roll over assets to an IRA for which the adviser will provide advice?

Q7. Is the BIC Exemption available for recommendations to roll over assets to an IRA to be managed on a going-forward basis by a discretionary investment manager?

Q8. Is the BIC Exemption available for prohibited conflicts of interest arising from the actions of a discretionary manager of assets held in a plan or IRA? What exemptions are available for these prohibited transactions?

Q9. The full BIC Exemption1 provides that financial institutions cannot "use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives 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." Does this provision categorically preclude financial institutions from paying higher commission rates to advisers based on volume (e.g., by using an escalating grid under which the percentage commission paid to the adviser increases at certain thresholds).

Q10. Is "robo-advice" covered by the BIC Exemption or other exemption?

Q11. Does the full BIC Exemption prohibit a financial institution or adviser from discounting prices paid by customers for services?

Q12. Is the payment of recruitment bonuses or awards to an adviser by a financial institution permissible under the full BIC Exemption? Does it matter if the bonus or award is contingent on the achievement of one or more sales targets?

 

Best Interest Contract Exemption – Level Fee Fiduciaries

Q13. Under the BIC Exemption, who are "level fee fiduciaries" and what prohibited transaction relief is available to them?

Q14. Can an adviser and financial institution rely on the level fee provisions of the BIC Exemption for investment advice to roll over from an existing plan to an IRA if the adviser does not have reliable information about the existing plan's expenses and features?

Q15. In order for a financial institution to rely upon the streamlined provisions for "level fee fiduciaries" must the financial institution and its affiliates offer only "level fee" accounts?

Q16. Can a financial institution and adviser rely on the level fee provisions in the BIC Exemption to recommend a rollover from an employee benefit plan to an IRA if the adviser will become a discretionary manager with respect to the IRA assets after the rollover?

Q17. Can an adviser and financial institution rely on the level fee provisions in the BIC Exemption if they recommend that investors transfer from commission-based accounts to accounts paying only a "level fee"?

Q18. Can advisers and financial institutions rely on the "level fee" provisions in the BIC Exemption if they receive third party payments (e.g., 12b-1 fees or revenue sharing payments) in connection with the assets recommended? What if they only recommend assets that generate the same level of third party compensation?

Q19. Can a financial institution and adviser rely on the "level fee" provisions in the BIC Exemption if they sell only proprietary investments for which the financial institution pays the same commission to its advisers regardless of the investment selected?

Best Interest Contract Exemption – Bank Networking Arrangements

Q20. The BIC Exemption provisions regarding Bank Networking Arrangements address referrals by banks and bank employees only to non-affiliated financial institutions such as registered investment advisers, insurance companies or broker dealers. Why isn't relief provided for referrals to affiliates?

Best Interest Contract Exemption and PTE 84-24 – Annuities

Q21. Can "insurance-only" agents continue to sell fixed rate and fixed indexed annuities to retirement investors after the applicability date of the Rule?

Q22. Can insurance companies rely on independent insurance agents to sell fixed rate and fixed indexed annuities to retirement investors after the applicability date of the Rule?

Q23. What is the role of insurance intermediaries, such as independent marketing organizations (IMOs), in the sale of annuity contracts to retirement investors after the applicability date of the Rule? Can they receive compensation such as commissions and override payments?

 

Disclosures under the Best Interest Contract Exemption

Q24. After January 1, 2018, the full BIC Exemption requires the financial institution 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. Does the financial institution's website have to maintain an executed copy of each retirement investor's contract or is a model contract acceptable?

Q25. How does a financial institution relying on a retirement investor's negative consent to amend an existing contract satisfy Section II(a)(2) of the full BIC Exemption, requiring the financial institution to maintain an electronic copy of the retirement investor's best interest contract on its web site that is accessible by the retirement investor?

Q26. Must the transaction disclosure required by Section III(a) of the full BIC Exemption be provided in connection with a recommendation to hold or to sell an investment product?

Q27. If a retirement investor requests specific disclosure of costs, fees or other compensation regarding recommended transactions under Section II(e) or III(a) of the full BIC Exemption, does this require the financial institution to disclose costs, fees or other compensation as of the date of the recommendation or as of the date of the request?

Grandfathering in the Best Interest Contract Exemption

Q28. Are dividend reinvestment programs "systematic purchase programs" eligible for grandfathering relief under Section VII of the BIC Exemption?

Q29. Under Section VII(b)(3) of the BIC Exemption, grandfathering relief is not available for compensation received in connection with the investment of additional amounts in a previously acquired investment vehicle. If an adviser provides investment advice that a retirement investor invest an additional $100,000 in an annuity contract acquired prior to the applicability date, does that new deposit cause the "old money" in the annuity contract to cease to be eligible for grandfathering relief?

Q30. Does investment advice to sell an investment product qualify for grandfathering under Section VII of the BIC Exemption?

Principal Transactions Exemption

Q31. Is there a way to get an exemption for advice to engage in principal transactions involving assets that are not specifically covered by the Principal Transactions Exemption?

PTE 84-24

Q32. Does PTE 84-24 cover rollovers into an annuity?

Q33. The wording of PTE 84-24's reasonable compensation standard differs from the reasonable compensation standard used in the BIC Exemption. Does the Department intend to interpret them differently?

Compliance

Q34. How will the Department approach implementation of the new rule and exemptions during the period when financial institutions and advisers are coming into compliance?

Contact Cinthia Murphy at [email protected]

 

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.