Detailed Fiduciary Rule FAQ Published By DOL

Acknowledging that “smart regulation is only as effective as its implementation,” the DOL has issued extensive guidance for advisers and providers seeking to comply with the new conflict of interest standards and prohibitions.

The Department of Labor (DOL) has published an in-depth FAQ document based on the input received from the financial services industry and others in response to the April finalization of the new, stricter fiduciary standard to be applied starting next year under the Employee Retirement Income Security Act (ERISA).  

“These questions are an important part of the regulatory process as they allow the department to clarify important parts of the rule,” explains Phyllis Borzi, assistant secretary for Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor, “and to head off misunderstandings that could lead to bad results for retirement savers, or financial services professionals.”

Borzi adds that she “believes we have succeeded in this effort, and our continued engagement with the industry will only make the rules work better,” and that the FAQ published today are the first of several that will be published in the coming months.

Today’s release addresses general questions like, “How will the Labor Department approach implementation of the new rule and exemptions during the period when financial institutions and advisers are coming into compliance?” as well as much more exacting questions about specific circumstances advisory firms are likely to face.

NEXT: Details from the FAQ release 

On the question of when, exactly, do firms and their advisers have to comply with the conditions of the new BIC Exemption and Principal Transactions Exemption, the DOL makes it clear that it intends to stick to the initial deadlines set earlier this year.

“The Department has adopted a phased implementation approach to both of these exemptions,” the FAQ explains. “The Rule’s amended definition of fiduciary advice will first apply on April 10, 2017. On that same date, the BIC Exemption and Principal Transactions Exemption will become available to fiduciary advisers. At the outset, however, and for a transition period extending until January 1, 2018, fewer conditions will apply to financial institutions and advisers that seek to rely upon the exemptions.”

DOL says the transition period gives these fiduciaries ample time to prepare for full compliance with all of the conditions of the exemptions, while providing basic safeguards to protect the interests of retirement investors. Important to note, during the transition period, financial institutions and advisers still must comply with the “impartial conduct standards” which are consumer protection standards that ensure that advisers adhere to fiduciary norms and basic standards of fair dealing.

On the related but importantly distinct question of when firms and their advisers have to comply with the new conditions added to preexisting exemptions that were amended in connection with the fiduciary rule reform (such as the 84-24 annuity exemption, among a handful of others), the DOL says the full compliance deadline is April 10, 2017.

“The impartial conduct standards simply require fiduciaries to adhere to basic fiduciary norms and standards of fair dealing (act in the best interest of customers, charge no more than reasonable compensation, and avoid misleading statements). The Department concluded that financial institutions and their advisers should be able to meet these standards within a year after publication of the Rule in the Federal Register, and accordingly requires compliance with these conditions beginning April 10, 2017,” DOL explains.

There is, however, an additional transition period for certain transactions under the exemption known as “PTE 86-128,” which generally require a written authorization executed in advance by an independent fiduciary or individual retirement account (IRA) owner. More detail is in the release itself.

“For IRAs and non-ERISA plans that were already customers of the financial institution as of April 10, 2017, the fiduciary engaging in the transaction need not obtain affirmative written consent for such transactions as would otherwise be required, but instead may rely on negative consent, as long as the fiduciary gave the required disclosures and consent termination form to the customer by that date (See PTE 86-128, as amended, at Section III(b)(2)),” DOL clarifies.

NEXT: More important details

Other questions/answers highlighted in the document are a lot more abrupt.

For example, on the question, “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?” DOL says the short answer is simply, “Yes.”

“The BIC Exemption is broadly available for a wide variety of transactions relating to the provision of fiduciary advice in the market for retail investments,” DOL says. “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 and beneficiaries and IRA owners, and is intended by the department to serve as the primary exemption for investment advice transactions involving these retail investors.”

Interestingly, the FAQ suggests compliance with the BIC Exemption is not 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. “In the absence of an investment recommendation, the rule does not treat individuals or firms as investment advice fiduciaries merely because they execute transactions at the customer’s direction,” DOL explains.

Another FAQ response makes it clear that the ongoing receipt of 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 does not, in and of itself, raise prohibited transaction concerns or require a fiduciary to comply with a prohibited transaction exemption.

“However, transactions involving this kind of compensation may raise conflict of interest concerns,” DOL warns. “For example, there is a clear and substantial conflict of interest when an adviser recommends that a participant roll retirement savings out of a plan into a fee-based account that will generate ongoing fees for the adviser that he would not otherwise receive, even if the fees going-forward do not vary with the assets recommended or invested.”

NEXT: FAQ should prove valuable 

Given the highly detailed requirements of the rule’s various restrictions and exemptions, the FAQ document will undoubtedly make for valuable reading for any defined contribution (DC) plan industry practitioner. There are numerous detailed explanations of the specific circumstances in which the BIC may or may not need to be evoked by different types of advisers and product providers—especially as it all pertains to rollovers and the way fees are measured.

For example, DOL says it has received many questions to this effect: “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?”

In the FAQ document, DOL says 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. Persons with such discretionary investment authority have long been treated as fiduciaries under ERISA and the Internal Revenue Code. As such, they have been and continue to be subject to a regulatory regime that specifically addresses the issues raised when a fiduciary is given the discretionary authority to manage plan assets. Including discretionary fiduciaries in the relief provided by the BIC Exemption could expose discretionary fiduciaries—and the retirement investors they serve as fiduciaries—to conflicts they are currently not exposed to. The conditions of the BIC Exemption are tailored to the conflicts that arise in the context of the provision of investment advice, not the conflicts that could arise with respect to discretionary money managers.”

For advisory firms expecting to continue to utilize commission-base sales structures in which higher volumes of sales are more richly rewarded, there is a lot of food for thought in the FAQ. For example, DOL says such 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.”

In short, financial institutions may use such payment structures if they are “not intended or reasonably expected to cause advisers to make recommendations that are not in the best interest of retirement investors and they do not cause advisers to violate the reasonable compensation standard.”

** PLANADVISER will be gathering responses to the FAQ from advisers, attorneys and other ERISA experts, so stay tuned!