New Fiduciary Rule Guidance Confirms Relief For Investment Advisers



Investment advisers and firms may continue receiving compensation for their investment advice under an exemption from the Labor Department’s fiduciary rule, the DOL said.

The conditions for qualifying for the Best Interest Contract Exemption were detailed in a set of frequently-asked-questions issued by the agency on Oct. 27.

In general, if a financial institution receives compensation that creates a conflict of interest, the transaction must meet the terms of the exemption to avoid being treated as a prohibited transaction, the DOL said.

The fiduciary rule, effective April 10, 2017, tightens conflict-of-interest restrictions on financial advisers handling retirement accounts. The BICE also kicks in on April 10, 2017, with a full set of conditions going live on Jan. 1, 2018.

“In light of the election results, it seems to me to be reasonable to wonder whether the new fiduciary rules will in the long term, or even the short term, ultimately survive at all,” Andrew Oringer, a partner with Dechert LLP in New York, told Bloomberg BNA on November 9.

On Schedule

“Financial institutions needed to hear one way or the other” whether DOL intended to postpone the effective date of the rule or its exemptions, Oringer told Bloomberg BNA on Nov. 4.

The FAQs make clear that there will be no postponement, he said.

Oringer cited three examples of instances in the FAQs where DOL clarifies or adds details on the BICE.

Internal Compensation Practices

FAQ 9 addressed internal compensation practices that might be permissible under the BICE, including the use of compensation grids, Oringer said.

The FAQ asks whether the full BICE precludes financial institutions from paying higher commission rates to advisers based on volume. This might include, for example, “using an escalating grid under which the percentage commission paid to the adviser increases at certain thresholds,” it said.

“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,” the DOL said.

Consequently, when reviewing possible grid structures, “they should carefully consider the amounts used as the basis for calculating adviser compensation to avoid transmitting firm-level conflicts to the adviser,” it said.

Level-Fee Fiduciaries

FAQ 19 addresses the relief available to “level fee” fiduciaries under the BICE, Oringer said. Relief for these fiduciaries is subject to a limited set of conditions called “BIC lite.”

A level fee fiduciary receives a fee or compensation on the basis of a fixed percentage of the value of assets or a set fee that does not vary with the particular investment recommended.

FAQ 19 asks whether a financial institution and adviser can rely on the “level fee provision” in the BICE if they sell only proprietary investments for which the financial institution pays the same commission to its advisers regardless of the investment selected.

This FAQ makes clear that that the BIC lite is “completely unusable in the case of commission arrangements or any arrangement that is exclusively for the sale of proprietary funds,” Oringer said.

Loan Arrangements                                                                                        

FAQ 12 addresses adviser recruitment programs that many financial institutions maintain, Oringer said.

The DOL noted that some financial institutions use forgivable loans expressly contingent on the adviser’s achievement of sales or asset targets. The DOL warned that these “back-end” awards “can create acute conflicts of interest that are inconsistent with the full BIC Exemption’s requirement that financial institutions adopt policies and procedures reasonably and prudently designed to ensure that individual advisers adhere to the exemption’s impartial conduct standards.”

In general, financial institutions may not enter into such arrangements under the full BICE, the DOL said, because these “disproportional amounts of compensation significantly increase conflicts of interest for advisers making recommendations to investors, particularly as the adviser approaches the target.”

However, firms may have entered into these awards with advisers prior to the date of the guidance, “and may be contractually obligated to honor their commitments for some period into the future,” the DOL said.

The DOL will not “treat the parties as having created an impermissible incentive structure under the exemption based on such a pre-existing agreement,” it said.

A financial institution may continue with these arrangements as part of a written and binding contract, and the institution “determines in good faith that it is contractually bound in good faith to continue the arrangement after” the fiduciary rule takes effect, the DOL said.

In so doing, the institution must exercise “stringent oversight of the adviser during the period of the arrangement,” the DOL said.

“This provision is significant because it is actual relief, to come out and say that if you have an existing loan arrangement, you don’t have to unwind it, provided you are monitoring best interest concerns,” Oringer said.

See related story, Retirement Advisers Get Batch of Fiduciary Rule Guidance.

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