DOL’s First FAQ ‘Wave’ Focuses on BIC

By Nevin Adams • October 28, 2016 • 0 Comments

The 24-page document covers a lot of ground in the form of 34 questions, and while much of it seems to confirm what had been understood (or assumed), the first wave of FAQs certainly provides some comfort – and in some cases clarifies key issues. 

Those who had hoped for some extension in the effective dates will be disappointed. The Labor Department said that, “in light of the importance of the Rule’s consumer protections and the significance of the continuing monetary harm to retirement investors without the Rule’s changes,” it felt that the year since publication of the final rule in the Federal Register was “appropriate and provides adequate time for plans and financial service providers to adjust to the change from non-fiduciary to fiduciary status” (the FAQs did offer an additional transition period for certain transactions that generally require a written authorization executed in advance by an independent fiduciary).

Among the key points:

• The Labor Department is restricting the use of compensation grids – these must be gradual, not steep, and cannot be retroactive (Q9).

• Recruitment “awards” are still permitted, if not tied to the movement of assets – but no back-end awards going forward (Q12).

• Rollover documentation is required, regardless of whether the full BIC or level fee exemption is used. Addressed reliance on the level fee provisions of the BIC Exemption for investment advice to roll over from an existing plan to an IRA if the adviser does not have reliable information about the existing plan’s expenses and features (Q14).

• So-called “hybrid” firms can utilize the streamlined level fee exemption for their advisory business (Q15).

• The level fee exemption is available for rollover transactions, even if the adviser has subsequent discretionary authority over IRA assets (Q16).

• The level fee exemption is available for a conversion of a commission-based account to fee-based account (Q17).

• Any third-party payments will preclude use of the level fee exemption – meaning that a so-called “Frost offset” will not eligible for the level fee exemption (Q18).

• The level-fee exemption is not available with respect to proprietary investments (Q19). 

• A rollover to a fixed annuity is covered by the 84-24 PTE, and does not require a BIC (Q32).

The FAQs also:

• Confirmed that the BIC Exemption is broadly available for recommendations on all categories of assets in the retail advice market, as well as advice on rolling assets into an IRA or hiring an adviser (Q3).

• Clarified that, in the absence of an investment recommendation, the rule does not treat individuals or firms as investment advice fiduciaries merely because they execute transactions at the customer’s direction (Q4). 

• Noted that the ongoing receipt of compensation based on a fixed percentage of the value of the assets under management, where such values are determined by readily available independent sources or independent valuations, does not, in and of itself, violate the prohibited transaction rules or require compliance with an exemption, though “certain abusive practices” involving fee-based accounts can violate the prohibition on self-dealing (Q5).

• Clarified that the BIC Exemption is available for advisers who act as discretionary fiduciaries to retirement plans and then provide investment advice to a participant to roll over assets to an IRA for which the adviser will provide advice, and for recommendations to roll over assets to an IRA to be managed on a going-forward basis by a discretionary investment manager (Q6 & Q7).

• Confirmed that the full BIC Exemption does not cover advice provided solely through an interactive website in which computer software-based models or applications provide recommendations without any personal interaction or advice from an individual adviser (i.e., robo-advice) based on the DOL’s view that “the marketplace for robo-advice is still evolving in ways that appear to avoid conflicts of interest that would violate the prohibited transactions provisions and that minimize cost,” although the DOL said that the BIC does provide relief for robo-advice providers that are “level fee fiduciaries.” (Q10)

• Explained that the BIC Exemption is available for investment advice to roll over a plan account to an IRA, even if the adviser will subsequently serve as a discretionary investment manager with respect to the IRA – as long as the adviser does not have or exercise any discretionary authority or discretionary control with respect to the decision to roll over assets of the plan to an IRA (Q15).

The FAQs also dealt with bank networking arrangements, fixed rate and fixed indexed annuity transactions, the role of independent marketing organizations (IMOs), and disclosures under the BIC.