Will the SEC Eliminate the Reasonable Compensation Rule?
In a recent blog post
, Fred Reish focuses on the issue of “reasonable compensation” for RIAs, broker-dealers and their advisors for their services to retirement plans and IRAs (qualified accounts), and what, if any, changes will be made to that requirement, going on to state that the myth here is that the SEC will draft rules that eliminate the reasonable compensation rule.
“That is incorrect,” he states plainly. “The reasonable compensation limitation on advisors and their supervisory entities is here to stay.”
Reish reminds readers that in fact (and despite the occasional headline to the contrary), the fiduciary regulation is currently in effect, having applied in full force on June 9, 2017. “While there are transition versions of the prohibited transaction exemptions,” he writes, “the fiduciary regulation was not modified to be a transition version.”
He then proceeds to remind readers that the effect of the fiduciary regulation is to broadly expand the definition of who is a fiduciary, and that because of the regulation, virtually anyone who makes an investment or insurance recommendation to a plan, a participant or an IRA owner is a fiduciary.
That said, the conflict-of-interest exceptions only partially applied on June 9. The most important exemption — the Best Interest Contract Exemption (BICE) — requires only that advisors and their supervisory entities adhere to the Impartial Conduct Standards.
Reish notes that even if the reasonable compensation condition in the BICE is removed from the exemption, that will not mean that advisers and their supervisory entities can ignore that limit. And even if the SEC or FINRA do not impose a reasonable compensation limitation, that will not change the rule because the reasonable compensation limit is found in both the Internal Revenue Code and ERISA. “In other words, it is a statutory requirement. Neither the DOL, the SEC nor FINRA can issue a rule that overrides a statute,” he explains.
Moreover, he notes that even if the definition of fiduciary is changed and an advisor is no longer a fiduciary, the reasonable compensation limitation in the Code and ERISA applies to all service providers, regardless of whether they are fiduciaries.
So, what is “reasonable” compensation? Reish devotes the remainder of the blog post
to that subject.