Department of Labor Issues First Set of FAQs on DOL Fiduciary Rule

On October 27, 2016, the DOL issued highly anticipated guidance on the Conflicts of Interest Rule in the form of FAQs that address the exemptions.  The Director of the Employee Benefits Security Administration (“EBSA”), Phyllis Borzi, indicated this is the first of three sets of FAQs and the second will be released very soon.

This first set of FAQs contains answers to 34 questions relating to the exemptions, primarily covering the Best Interest Contract Exemption (“BICE”) and the streamlined requirements for level-fee fiduciaries (as described in the BICE).

One issue that needed clarification is whether the BICE could be relied upon by discretionary advisers.  Questions 6-8 clarify that, as long as the adviser does not have discretion to implement the recommended action, such as an IRA rollover or the conversion of a commission-based account to a fee-based account, the adviser may rely on the BICE.  This is true even if the adviser would have discretionary authority over the invested assets.  The critical distinction is the discretionary authority does not enable the fiduciary to increase his/her compensation.

There has also been much discussion with regard to payout grids and whether they violate the BICE requirement of refraining from “the use of 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 Advisors to make recommendations that are not in the best interest of the retirement investor.”  Question 9 provides a thorough and useful analysis of the factors which may be problematic when utilizing payout grids.

The use of recruitment bonuses is addressed in Question 12.  Again, the DOL provided an analysis of factors that could be problematic when paying recruitment bonuses.

Question 13 provides some clarification on who is deemed a level-fee fiduciary and reiterated the definition of level-fee contained in the BICE, which states it is “a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended.”  The DOL’s answer also discussed that, while level-fee fiduciaries usually do not have the conflicts that cause a prohibited transaction, there can be times when conflicts exist.  One example they provided is when an adviser recommends a roll over from a plan to a fee based account where the adviser gets ongoing advisory fees, even when the fee being paid is a level fee. This Q&A did not address whether a tiered fee schedule that is not tied to investment recommendations or investment strategies would fall within the definition of level-fee.  A strict interpretation of the definition, as currently written, could cause one to conclude that tiered billing schedules are not fixed percentages meeting the definition of a level-fee fiduciary.

Questions 21-23 address insurance agencies and independent insurance agents.  The BICE can only be relied upon by a financial institution, however, there are many independent insurance agents that do not meet the definition of a financial institution.  There is also the question of intermediaries such as Independent Marketing Organizations (“IMOs”) and whether they can rely on the BICE.  The answers to these questions clarify a path forward.

Core Compliance & Legal Services, Inc. will be discussing the new DOL Fiduciary rule and these DOL FAQs during our upcoming Annual Compliance Symposium on November 3, 2016.  For more information about the agenda and location, please see  Should you have any questions, please call (619) 278-0020.

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