On October 27, 2016, the U.S. Department of Labor (the “DOL”) issued the first in a planned three-part set of FAQs on its new fiduciary rule. (For details on the fiduciary rule, see our prior Alert.) The FAQs include some important clarifications, including on the types of variable compensation structures that may be acceptable under the Best Interest Contract (“BIC”) Exemption, advisor recruitment bonuses, plan fee information that will be required to give advice on IRA rollovers, certain requirements related to the BIC website and the use of dividend reinvestment programs for arrangements grandfathered from full BIC Exemption compliance. The DOL also reiterated its intent to require compliance beginning on April 10, 2017.
The most notable FAQs, and possible implications and action items for financial institutions, advisors, and asset managers, are described below.
FAQ Answer |
Potential Implications / Action Items |
Compensation Grids: Compensation grids may be
used, but should be designed to avoid incentivizing advisors to
give advice that may have a disproportionate impact on their
overall compensation (i.e., tiers or steps should be infrequent and
provide for modest increases; moving up a grid should not
retroactively increase compensation for past work). |
Institutions
that have already made preliminary decisions about changes to
compensation structures should evaluate their new structures.
Compensation-related policies should specifically address the
monitoring of advisor behavior when an advisor is at or near the
next tier or step in a compensation grid. |
Recruitment Bonuses: Signing bonuses that are not
tied to an advisor bringing accounts to the financial institution
or asset/sales targets are permitted under the BIC Exemption.
Back-end awards that are contingent on the movement of accounts or
on sales targets are generally not permitted under the BIC, but
binding arrangements entered into prior to October 27, 2016 are
grandfathered, subject to the financial institution stringently
overseeing and adopting special policies and procedures relating to
these arrangements. |
Institutions
should stop offering new back-end recruitment bonuses contingent on
the movement of accounts or sales targets immediately. Institutions
with grandfathered back-end bonus structures should begin preparing
new policies and procedures to monitor these arrangements. |
IRA
Rollovers: Advisors providing advice on rollovers from
benefit plans into IRAs must consider the fees and expenses of the
plan and the IRA in determining whether the rollover is in the
investor’s best interest. If this information cannot be
obtained from participant-level disclosures despite prudent
efforts, then the financial institution may rely on the
plan’s Form 5500 or “reliable benchmarks” on fees
for similar plans, but must explain the limits on the data and how
it concluded that reliance on the data was reasonable. Institutions
relying on the “level fee fiduciary” exemption are
required to document the decision-making process in writing, but
all institutions must go through the analysis. (Note that the
requirement for institutions relying on the full BIC Exemption to
undertake this analysis had not previously been expressly stated by
the DOL.) |
Institutions
that plan to give advice on rollovers should begin preparing
policies and best practices for obtaining information on plan fees
and expenses. Institutions that plan on giving rollover advice in
reliance on the full BIC Exemption should prepare to integrate this
analysis into their recommendations. |
Posting
Contract to Website: The requirement to post each
investor’s individual BIC contract to the financial
institution’s website may be satisfied by posting the form of
contract along with an acknowledgement that the financial
institution is bound to follow the contract. The DOL stated that
the best practice is to post individual signed contracts. |
Institutions
should consider whether to build a system to capture, store and
provide access to individual signed contracts or just to post the
form of contract and acknowledgement instead. |
Dividend
Reinvestment Programs: The BIC permits additional amounts
to be invested into grandfathered investments if those investments
are made via a systematic purchase program that was entered into
prior to April 10, 2017. The FAQs clarify that an automatic
dividend reinvestment program may qualify as a systematic purchase
program. |
Asset managers
that permit investors to elect to reinvest dividends or other
distributions into their funds should consider having these
investors enter into automatic reinvestment programs prior to April
10, 2017, to avail themselves of grandfathered status with respect
to any otherwise covered investment advice the managers may have
given the investors in connection with the original investment, or
the decision to reinvest distributions. |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.