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On October 27, 2016, the Department of Labor released answers to 34 “Frequently Asked Questions,” providing additional guidance on application of the Best Interest Contract Exemption (BIC) and certain other exemptions released in connection with its new Conflict of Interest rule. According to DOL, the new FAQs are part of a series that it expects to issue. This first batch of FAQs, on the BIC, is primarily of interest to providers – for instance, it describes in detail rules for the payment of recruitment bonuses by financial institutions.
At this point, the threshold question for most DC plan sponsors will be: shall we allow our providers to give any fiduciary advice to plan participants, given that doing so may then require plan-fiduciary monitoring of provider-fiduciary compliance with the new rules (including the BIC)? (In this regard, see our article Monitoring advice providers under the new Conflict of Interest regulation.)
In what follows we very briefly discuss some elements of the FAQs that may bear on that first order sponsor question: To what extent do the FAQs provide additional guidance/clarification as to those situations in which (i) the Conflict of Interest rule would apply, (ii) an adviser-fiduciary would therefore have to comply with the BIC and (iii) the sponsor-fiduciary would (conceivably) have to monitor that compliance?
Rollovers where there had been no advice. Compliance with the BIC Exemption is generally not required for a transaction, e.g., a rollover, in the absence of a recommendation with respect to the distribution or its investment. Thus, e.g., a mutual fund-IRA provider that is staffing a plan’s call center would not have to comply with the BIC with respect to a rollover from the plan to one of its mutual fund-IRA products so long as no fiduciary advice is provided with respect to it. As we discuss in our article on the Conflict of Interest rule, advice either (i) to rollover or (ii) about how to invest the rollover would generally constitute fiduciary advice if the adviser or an affiliate receives direct or indirect compensation with respect to it and thus would require compliance.
Level fees and robo-advice. The FAQs detail the application of the Conflict of Interest rule and the BIC to level fee arrangements (including in certain respects “robo-advice”). As the rule itself makes clear, while these arrangements may get a “pass” with respect to certain requirements, they do present two issues that clearly come within the scope of the rule. First, advice to rollover from a plan to a level fee arrangement is subject to special requirements under the rule (e.g., the adviser must “document the reasons why the advice [to rollover] was considered to be in the best interest of the retirement investor”). And, second, “certain abusive practices involving fee-based accounts can violate the prohibition on self-dealing … e.g., recommending a fee-based account to an investor with low trading activity and no need for ongoing monitoring or advice.”
Discretionary advisers. The FAQs to some extent clear up the application of the new Conflict of Interest rule and the BIC to discretionary advisers. Generally, discretionary advisers are not covered by the new Conflict of Interest rule because they are already fiduciaries (by virtue of their discretion over a participant’s account). Similarly, the BIC does not generally cover them. The BIC does, however, apply to advice that a discretionary adviser may give with respect to a rollover decision, where the adviser has no discretionary authority over that decision. Thus, a managed account fiduciary without discretion over the decision to rollover/not rollover can use the BIC to advise the participant to rollover, e.g., to an IRA affiliated with the managed account fiduciary.
Scope of the BIC. There had been some question as to whether the BIC would be available with respect to certain transactions that were prohibited by the Conflict of Interest rule. In this regard, DOL stated that the BIC “broadly covers recommendations to retail investors, including recommendations with respect to all categories of assets, advice to roll over plan assets, and recommendations on persons the customer should hire to serve as investment advisers or managers.”
Compliance – emphasis on assistance. In the BIC (and in speeches by DOL officials), DOL has emphasized that in the beginning its focus will be on “assistance” rather than on penalizing (non-abusive) non-compliance:
Although the Department has broad authority to investigate or audit employee benefit plans and plan fiduciaries, compliance assistance is a high priority for the Department. The Department’s general approach to implementation will be marked by an emphasis on assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions and others who are working diligently and in good faith to understand and come into compliance with the new rule and exemptions.
Other areas covered by the FAQs. The FAQs also include additional guidance with respect to: the sorts of financial institution compensation schemes permitted under the BIC; the application of the BIC to bank networking arrangements and annuities; required financial institution disclosures under the BIC; the grandfathering of certain arrangement under the BIC.
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As noted, this is the first in a series of FAQs on DOL’s new Conflict of Interest rule. We will continue to follow this issue.