The Department of Labor has released its widely anticipated frequently-asked-questions guidance on its fiduciary rule, answering 34 questions posed on new exemptions and amendments to existing exemptions.
Phyllis Borzi, assistant secretary of Labor for the DOL’s Employee Benefits Security Administration, said Nov. 1 that the release of the first wave of FAQs was imminent and that the Employee Benefits Security Administration anticipates releasing the FAQs in three waves. She noted that there could likely be multiple waves of FAQs.
Borzi said in a blog that the FAQs “are an important part of the regulatory process as they allow the department to clarify important parts of the rule, and head off misunderstandings that could lead to bad results for retirement savers, or financial services professionals.”
Making the answers public, Borzi continued, “is another example of our sincere efforts to work with the financial services industry to craft a rule that makes sense and works in the real world of investment advice.”
Other FAQs, Borzi said, will be published in the coming months.
The first FAQs note that in light of the importance of the fiduciary rule’s “consumer protections and the significance of the continuing monetary harm to retirement investors without the rule’s changes,” the April 10, 2017, applicability date is “appropriate and provides adequate time for plans and financial service providers to adjust to the change from non-fiduciary to fiduciary status.”
The FAQs address the applicability date of the new Prohibited Transaction Exemptions — the Best Interest Contract Exemption and the principal transactions exemptions — as well as amendments to existing PTEs 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128.
Joshua Waldbeser, a counsel with Drinker Biddle & Reath, noted that, as anticipated, the FAQ includes “no significant surprises or reversals,” with most of the answers fleshing out “the general principles set forth in the exemptions.”
One of the FAQs “confirms that volume-based commission grids can be permissible under BICE, if they’re structured appropriately,” Waldbeser said. “For example, it indicates that the size of the steps should ideally be small, to prevent disproportionately large incentives as to any particular recommendation, and that the increases should generally be applied prospectively only.”
The guidance also indicates that recruitment bonuses that are tied to back-end sales goals may be problematic under BICE, Waldbeser explained, “but that some transition relief will be available for these types of arrangements that are already in existence, where the institution is contractually bound to follow them.”
Many of the questions and answers focus specifically on BICE.
One query asks whether the BIC Exemption is 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 advisor.
The DOL’s answer: 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. Under the Employee Retirement Income Security Act and the [IRS] Code, parties providing fiduciary investment advice to plan sponsors, plan participants and beneficiaries, and IRA owners are not permitted to receive payments creating conflicts of interest unless they comply with a prohibited transaction exemption. Thus, if an advisor or financial institution receives compensation that creates such a conflict of interest (e.g., transaction-based payments such as commissions, or third party payments such as 12b-1 fees or revenue sharing), the transaction generally must meet the terms of an exemption.
Another question: Is compliance with the BIC Exemption required as a condition of executing a transaction, such as a rollover, at the direction of a client/member in the absence of an investment recommendation?
The answer: No. 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. Similarly, even if a person recommends a particular investment, the person is not a fiduciary unless the person receives compensation, direct or indirect, as a result of the advice.
The DOL noted, however, that if the financial organization or advisor does make a recommendation concerning a rollover or investment transaction and receives compensation in connection with or as a result of that recommendation, it would be a fiduciary and would need to rely on an exemption.
How about robo-advice? Is it covered by the BIC Exemption or other exemption?
The answer: The full BIC Exemption does not cover advice provided solely through an interactive website in which computer software-based models or applications provide recommendations based on personal information that the investor supplies without any personal interaction or advice from an individual advisor (i.e., robo-advice), the DOL said.
However, the DOL said that it did not make the full BIC Exemption generally available for such robo-advice based on its view that the marketplace for robo-advice is still evolving in ways that appear to avoid conflicts of interest that would violate the prohibited transactions provisions and that minimize cost.
Waldbeser also noted that one of the FAQs describes alternative sources of information that might be relied on in determining whether an IRA rollover is in a plan participant’s best interest, where information about the specific plan isn’t given to the advisor.
“The guidance confirms that the relief for ‘level-fee fiduciaries’ who recommend IRA rollovers or transfers – which we call ‘BIC Lite’ – isn’t available under ‘level-commission’ type structures,” he said.
Some clarity surrounding the grandfathering relief is also provided in the FAQs, Waldbeser added. “Probably most notably, it explains that where additional money is invested in a pre-existing product after April 10, 2017, the grandfathering relief isn’t lost entirely. That is – the grandfathering relief isn’t lost as to compensation for the pre-existing portion of the investment. Also, it clarifies that dividend reinvestment programs will be considered ‘systematic purchase programs’ eligible for grandfathering relief.”
The FAQs also clarifies, Waldbeser said, “that ‘sell’ recommendations as to pre-existing assets are eligible for grandfathering – some financial institutions had interpreted the relief as only applying to ‘hold’ recommendations.”