Common Misconceptions about the New DOL Rules
Posted on 11/9/2016
The new Department of Labor rule was a hefty 1000 page thriller that left IAs and BDs with not only a daunting task ahead of them but a lot of unanswered questions. Not surprisingly, there is a good deal of confusion and uncertainty among firms trying to comply with the new rules. In this article, we will discuss some of the more common misconceptions we are hearing.
“I’m already a fiduciary so I don’t have to change anything.”
We hear this a lot from investment advisers who have concluded that, as they are fiduciaries under the Advisers Act, nothing more needs to be done. However, the definition of “fiduciary,” and the requirements for fiduciaries, differ dramatically between the Advisers Act and ERISA. Under the Advisers Act, an adviser meets its fiduciary duty through full and fair disclosure. By and large, disclosure is necessary and sufficient to meet this duty. However, under ERISA, a fiduciary meets its duties by working within available prohibited transaction exemptions (“PTEs”). Under the Department of Labor’s new rules, while disclosure is required by the Best Interest Contract Exemption, it is only one part of the exemption. Disclosure is necessary but not sufficient to meet the fiduciary requirements of an adviser using the Best Interest Contract Exemption.
“I just need the Best Interest Contract, disclosure templates for my website and the negative consent letter to comply with the new rule.”
First, firms need to understand just how the rules apply to them. For one thing, discretionary services are excluded from the BICE, and must rely on other PTEs. For another, firms that charge “level fees” are eligible for the less onerous “BIC Lite” agreement – but firms must carefully understand which fees are truly level and which are not. Study, analysis and preparation are required before deciding what must be in place by April 2017 and what can wait until January 10, 2018.
“I’m going to move all my retirement business from commission based to fee only accounts…problem solved!”
While this may be acceptable in many cases, the Department of Labor was quick to point out that, as of April 10, 2017, moving to a fee-based account is considered a “recommendation,” making you a fiduciary under the rule and requiring you to comply with one of the prohibited transaction exemptions. Whether that means using the Best Interest Contract Exemption (most likely) or another PTE, the recommendation must be in the best interest of the client and you will therefore need to justify the reason for charging an ongoing management fee.
I have plenty of time to comply, the deadline isn’t until January 2018!
The actual substance of the policies and procedures and other basic aspects of complying with the exemption should be decided and in place by April 10, 2017, since the obligation to acknowledge fiduciary status and to comply with the impartial conduct standards will apply.
The DOL did provide additional time to come in to full compliance with all requirements of the Best Interest Contract Exemption (such as developing the required Web disclosure page). While the policies and procedures to meet all of the BICE requirements won’t be required until January 2018, you should at least have working procedures in place to document how you are acknowledging fiduciary status and adhering to impartial conduct standards.
“I’m waiting until the DOL releases more guidance before starting anything related to the rule.”
We all know there are many unanswered questions, and we are waiting on the edge of our seats for answers. But, realistically, you cannot wait for additional guidance to start asking the right questions and coming up with a plan. As noted above, you must start acting like an ERISA fiduciary by April 10, 2017.
Once you’ve identified those situations in which you are a fiduciary under the new rule, you will need to identify which client accounts will require you to be a fiduciary. On which prohibited transaction exemptions will your firm rely? Can you outline action items for complying with the different exemptions you will be using? Do you want to offer separate services for retirement and non-retirement accounts? How will you ensure your reps are adhering to the impartial conduct standards? Do you need to improve processes for documenting reasons for investment recommendations? How will you address the use of investment recommendations in your marketing process?
“There are so many lawsuits in the works, I’m not putting effort in just to have the rule go away!”
That’s a risky bet! Unless one of the courts grants a delay or an injunction (which the courts that have begun hearing cases have not yet done), the April 10 deadline will remain in place. Every minute you aren’t preparing for the rule changes leaves you with less time and more stress as the due date approaches.
“I’m just a solicitor, this rule doesn’t apply to me.”
Under the DOL's new rules, a solicitor who recommends a particular adviser in exchange for compensation will be a fiduciary. It remains unclear just how solicitors (and the firms that use them) will comply with the new rules.
“I only asked the client to HIRE ME, I didn’t meet the definition of fiduciary…did I?”
The Final Regulation clearly provides that one does not become a fiduciary merely by marketing oneself or an affiliate as a potential advice fiduciary, unless that recommendation is coupled with an investment recommendation. Thus, a fee-based adviser can freely “recommend” his or her services.
However, in practice, the vast majority of such “hire me” recommendations are likely to be made in conjunction with an investment recommendation. Advisers using recommendations in marketing to clients will need to be certain that those recommendations are consistent with the best interests of the client.
If you are a firm working with retirement accounts, it’s important that you really take a good look at your business and consider how your firm will best deal with meeting all the requirements. At least for the time being, take a look, put your heads together and come up with a plan. Consider the issues at your firm that currently conflict with the new rules, create a plan for how your firm will meet these rules, and implement at least the initial stages of the plan by April 10.