Department of Labor released a final statement April 6, 2016 on the Fiduciary Rule for brokerages, representatives, and investment advisors working with senior investors and retiree investment products.
While the rule is a lighter version of the original proposal and provides concessions for BD’s and RIA’s with senior retiree clients, the purpose is clear; new fiduciary standards are expected, documented, and required going forward.
Labor Secretary Thomas Perez said, “We are putting… a fundamental protection into the American retirement landscape. A consumer’s best interest must now come before an advisors financial interest.” The rule as it was proposed has been scrutinized and changed several times of the past 6 years in consideration of comments from consumer groups, industry firms, and other stakeholders. Now a final version is in place and firms can begin drafting and adapting to new policy and procedure requirements.
Talking points of the 2016 DOL Fiduciary Rule
Deadline for compliance: April 2017
Compliance with the new requirements begin no later than 1 year after the final rule is published, April 2017. The allowance provides time for firms to change policies and procedures, and product portfolio’s to meet the new compliance regulations. Namely retirement investment service providers and representatives will need to adjust their retirement vehicle sales from non-fiduciary to fiduciary based product models.
Additional requirements of the rule go into effect January 1, 2018. The additional requirements include implementation of two exception features; the BICE (Best Interest Contract Exemption), and PTE (Principal Transactions Exemption). Basically, financial institutions and representatives are being given further leverage to adjust to all the conditions. However, by April 2017 all advisors and brokers working with retirement investments must be operating within the crux of strict fiduciary responsibility to senior investors.
What is BICE – Best Interest Contract Exemption
For the most part, the new rule “broadens” the definition of “fiduciary responsibility”. That said, some firms may qualify for allowances using BICE (also called BIC) exemptions. Under BICE, firms can opt for complying with limited standards like; acknowledging their fiduciary status, adhering to the “best interest” standard, and disclosing conflicts of interest.
The point of BICE is to allow representatives with existing clients to continue receiving “commission-based compensation”, now considered a conflict of interest on retirement vehicle product sales. This allowance falls under the purvey of ERISA codes which state individuals providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating a conflict of interest without a PTE, Prohibited Transaction Exemption. Prohibited Transaction Exemptions, PTE’s, are only authorized by the Secretary of Labor.
The Best Interest Contract Exemption permits firms to continue relying on their current compensation and fee models a long as they meet certain requirements intended to align the representative’s interests with those of the client and product itself. Advisers and institutions who are found out-of-bounds with established guidelines can be held accountable under ERISA statutory protections or a breach of contract claim.
What is required to qualify for BICE ?
- BICE requires the financial institution to acknowledge fiduciary status for itself and its advisors.
- The financial institution and advisers must adhere to basic standards of impartial conduct;
- Giving prudent advice
- Avoid making misleading statements
- Receiving no more than a reasonable compensation
- <Financial institutions must have policies and procedures in place to mitigate harm caused by conflicts of interest
- Financial institutions must disclose basic information about their conflicts of interest and cost of “advice”.
- The BICE exemption covers recommendations concerning any retiree investment product if the conditions of the exemption are satisfied.
What are the BICE exemption disclosure requirements:
- Descriptions of material conflicts of interest
- Fees or charges paid by the retirement investor
- Statement of the types of compensation the firm receives from 3rd parties with regards to recommended investments
- Investor rights to obtain specific disclosure of costs, fees, and other compensation upon request
- Regularly maintain information and make it easily accessible (i.e. website updates) about the financial institutions business model and associated conflicts of interest, compensation disclosures, and more.
PTE – Principal Transactions Exemption
PTE allows investment advice fiduciaries to sell or purchase debt securities and investments from their own inventory to-or-from plans and IRA’s. Similar to BICE requirements, disclosures and documentation are required.
Along with the PTE for investment fiduciaries, form PTE 84-24 is being revised to provide guidelines for insurance agents and brokers, and insurance companies, in order to ensure impartial conduct and sound investment planning are first and foremost in commission based sales vehicles.
All in all, many industry proponents including brokerage firms and representatives are comfortable with the DOL fiduciary rule release. Existing accounts stay mostly the way they were and a look-back at existing transactions is not in the criteria. Advisers and firms operating under BICE and PTA exemptions will enjoy some concessions, while other business models will be able to adapt to the new fiduciary standard. Most importantly, a push for greater consumer awareness coupled with a new fiduciary responsibility by representatives selling senior retirement investments is likely a step in the right direction.
Need help understanding how the 2016 fiduciary rule affects your firm?
Recent studies indicate broker firms are expected to spend a significant amount of time and resources on re-structuring compliance policies to meet the new fiduciary standard. There’s no need for the DOL 2016 Fiduciary Rule Standard to interfere with normal business activities and over-burden the compliance team. Outsource the compliance analysis and extra work to us. Let our professional staff serve as your DOL Fiduciary Rule Task Force and we’ll provide a gap analysis, report on the compliance risk, update policy and procedure programs, and conduct firm training. This way you can continue day-to-day business activities with minimal disruption to serving client needs and building the practice. RND Resources Inc. is committed to integrating compliance solutions with your business model to provide scaleable solutions for broker-dealers and RIA firms. Feel free to call or email us for a quote on consultation, training programs, and policy changes.
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