United States: Fiduciary Rule FAQs Challenge Back-End Recruitment Bonuses

Last Updated: November 9 2016
Article by Samuel S. Shaulson and Andrew J. Schaffran

Financial services firms with active recruiting programs should consider immediately how the DOL's FAQs affect their compensation packages with respect to back-end recruitment awards.

To help the financial services industry implement its Conflicted Advice Rule for Retirement Investors (the so-called "DOL Fiduciary Rule") scheduled to be effective on April 10, 2017 (the Rule), the US Department of Labor (DOL) released answers to a number of frequently asked questions (FAQs).

The FAQs aim to answer questions relating to the suite of new exemptions, including the Best Interest Contract (BIC) Exemption, as well as amendments to existing exemptions included in this wide-sweeping rulemaking. The BIC Exemption would provide relief that would permit an investment advice fiduciary to receive certain types of otherwise "prohibited compensation" where, among other things, the investment advice fiduciary acknowledges fiduciary status and, in some cases, contractually agrees to be subject to a "best interest" standard.

Background

Of immediate concern for broker-dealers and other financial institutions with registered representatives and advisers intending to rely on the BIC Exemption is FAQ12. FAQ12 calls into question whether, and to what extent, "back-end awards" can continue to be included in recruitment compensation packages after the Rule's effective date (currently April 10, 2017):

  • Back-end awards or bonus arrangements generally provide for contingent compensation based on preset asset or revenue targets extending over multiyear periods.
  • The DOL is concerned that these types of awards "significantly increase conflicts of interest for the advisers [dealing with retirement investors] . . . particularly as the adviser approaches the target" because the awards "commonly result in large amounts of income to the adviser . . . on an 'all or nothing' basis."
  • Based on the concern above, the DOL concludes that "financial institutions generally may not enter into such arrangements" when relying on the full BIC Exemption.

General Issue

As many broker-dealers and other financial institutions are intending to rely on the BIC Exemption in one form or another after the Rule's effective date, compensation packages need to be reviewed to determine whether they should be restructured to address the DOL's concerns.

Immediate Issue/DOL Grandfathering Rule

Because recruiting advisers is an ongoing process (with firms maintaining active inventories of open recruitment offers), and because compensation packages generally stretch over multiyear periods, which will extend past the Rule's effective date, firms need to start addressing these issues today. However, a "grandfathering rule" may apply under certain conditions:

  • Recognizing that firms may be contractually obligated to honor back-end bonus arrangements that were entered into in good faith prior to this new guidance, the DOL has created a "grandfathering rule."
  • Specifically, the DOL states that it was not its "intent to overturn such pre-existing binding contracts . . . and that the [DOL] would not treat the parties as having created an impermissible incentive structure under the exemption based on such a pre-existing agreement."
  • The guidance provides generally that a pre-existing arrangement exists if the firm entered into such an arrangement as part of a written and binding contract that it is contractually bound to honor prior to the date of the FAQ guidance, which was published on the DOL website on October 27, 2016.
  • The DOL goes on to state that to the "extent that the [firm] chooses to honor these pre-existing arrangements . . . it must adopt special policies and procedures specifically aimed at the conflict of interest introduced by the arrangement."

Practical Considerations

As firms generally have active recruitment programs, they should consider the following questions in light of the FAQs:

  • Will the firm rely on the BIC Exemption and be subject to this new guidance?
    • Relatedly, does the guidance have any applicability with respect to other exemptions subject to the DOL's new "impartial conduct standard" (e.g., PTE 77-4 for fiduciary investments in affiliated mutual funds) on which the firm may rely post Rule effective date?
  • Does the firm's standard recruitment package include bonuses or awards that could be viewed as running afoul of this guidance?
    • How can the firm restructure potentially problematic arrangements under this guidance?
    • How will the industry as a whole respond to these changes in compensation arrangements? What are the strategic ramifications of the changes?
  • What offers were outstanding as of the date that the FAQ guidance was published (October 27, 2016), and what constitutes a "contractually binding agreement" on behalf of the firm?
    • Were any offers accepted on the date of the guidance?
    • What process will the firm employ to determine in "good faith" whether it is contractually bound to honor arrangements entered into prior to the date of the FAQ guidance?
  • How will otherwise revocable offers that have not officially been accepted as of October 27, 2016 be treated?
    • What are the potential employment law and other legal issues related to revoking an offer?
    • Should outstanding offers be restructured and, if so, how?
    • Should the firm adopt some type of temporary or transitional compensation arrangements while evaluating these changes?
  • What special policies and procedures need to be adopted to address the DOL's concerns with any pre-existing recruitment arrangements?
  • What types of litigation and enforcement risks do these and similar types of arrangements represent to firms after the Rule goes into effect?

Morgan Lewis continues to evaluate the potential effects of FAQ12 (and the other FAQs) and analyze their potential impacts on our clients and the industry as a whole. We are closely following the Rule's development and will provide updates as they occur.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions