The Fourth, Less Well Known BICE Requirement
While many are likely aware that the Best Interest Contract Exemption (BICE) requires satisfaction of three impartial conduct standards, there is a fourth, less well known requirement.In a blog post
concerning the Department of Labor’s (DOL) fiduciary rule and exemptions, ERISA attorney Fred Reish reminds readers that the DOL on Aug. 31 proposed to extend the transition period for three prohibited transaction exemptions (BICE, the 84-24 exemption and the principal transactions exemption) until July 1, 2019, but it did not propose to extend the rule’s June 9, 2017, applicability date, meaning advisors to “qualified” accounts already are fiduciaries.
For those transactions needing the protection of a prohibited transaction exemption, the BIC is the exemption that will be used for most transactions, Reish explains. And while supervisory entities and advisors will need to satisfy the three impartial conduct standards — the best interest standard of care; no more than reasonable compensation; and no materially misleading statements — Reish cautions of a fourth requirement in the interim.
Specifically, he cites guidance from the DOL’s Aug. 31 proposal:
“During the Transition Period, the Department expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards. During that period, however, the Department does not require firms and advisers to give their customers a warranty regarding their adoption of specific best interest policies and procedures, nor does it insist that they adhere to all of the specific provisions of Section IV of the BIC Exemption as a condition of compliance. Instead, financial institutions retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards, whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches or combinations of approaches.”
Consequently, Reish stresses that supervisory entities need to ensure that their policies and procedures are adequate to protect retirement investors from the potential conflicts arising from advisor compensation that could incent an advisor to make recommendations that are not in the best interest of a retirement investor.
He explains that, while conflicts can arise in any situation involving commissions or similar transactions, there are other, less obvious, areas where the conflict can be significant and entities may need to consider strengthening policies and practices.
For example, Reish notes that when an advisor recommends that a participant roll a distribution over to an IRA, the recommendation typically results in higher compensation for the advisor, which can be significantly higher if the rollover amount is large.
As a result, financial institutions, such as broker-dealers and RIAs, need to have processes in place to ensure that inappropriate rollover recommendations are not made, Reish suggests. In addition, he notes that those recommendations need to be supervised to ensure compliance with the best interest standards.
Reish further advises that any arrangement that materially increases advisor compensation should be closely vetted at three levels:
- design of the compensation system;
- development of policies and procedures to oversee that fiduciary recommendations are in the best interest of retirement investors; and
- supervision of those policies and procedures.
According to Reish, the DOL will likely finalize within the next 60 days the extension of the three exemptions (BICE, the 84-24 exemption and the Principal Transactions Exemption), with the practical effect being both a delay in the applicability date of the final exemptions until July 1, 2019, and an extension of the transition versions of those exemptions until June 30, 2019.