The U.S. Department of Labor (DOL) in August proposed to extend the transition period by 18 months (in other words, from January 1, 2018, to July 1, 2019) for the full implementation of the Best Interest Contract Exemption (BICE), the Principal Transactions Exemption (PTE), and PTE 84-24 (relating to sales of annuities and other transactions involving insurance companies and agents).
The proposal, published in the Federal Register on August 31, was followed by a 15-day comment period. We think it is highly likely that the DOL will finalize the proposal (although changes to the proposal are possible).
What Do I Do Now?
In this uncertain environment, a critical and bottom-line question for financial advisers and financial institutions serving employer-sponsored retirement plans is, “What do I do during the transition period”?
The DOL stated that the Impartial Conduct Standards currently in effect will continue to be the sole conditions for the exemptions during the extended transition period (in other words, the period in which the exemption is available but compliance with the full conditions of the exemption is not necessary).
Briefly, as reported, the Impartial Conduct Standards require that the financial institution and its advisers: (1) act prudently and in the best interest of the retirement investor without regard to the financial institution’s or adviser’s interests; (2) charge no more than reasonable compensation; and (3) not make misleading statements. If your plan service providers are in compliance with those standards now, the proposed extension does not otherwise increase or extend their—or your plan’s—liability.
However, we note that it is unclear if the DOL will extend its current temporary enforcement policy on the exemptions. The DOL previously stated that it would not take action against financial service providers for failing to comply with the exemptions as long as they were “working diligently and in good faith to comply with the fiduciary duty rule and exemptions” during the transition period, which was then scheduled to end on January 1, 2018.
In its August proposal, the DOL asked for comments on whether to continue with this approach, suggesting that the DOL has not yet decided how to handle enforcement of the Impartial Conduct Standards.
For all their many faults, the exemptions, especially the full BICE, provided compliance professionals with a long checklist of specific compliance items. The Impartial Conduct Standards are somewhat more vague and do not necessarily lend themselves to easy compliance checklists.
List of Steps to Take
Below is a nonexhaustive list of steps that financial institutions and financial advisers working with employer plans can take to protect themselves and demonstrate compliance with the Impartial Conduct Standards during the extended transition period, or at least until it becomes more clear what the compliance landscape will look like after the transition period is over.
Although no single step listed below is required by law or regulation, we think it is important for financial advisers and institutions to take some steps to implement and enforce the Impartial Conduct Standards.
- Identify and code all retirement investors as Employee Retirement Income Security Act of 1974 (ERISA) plans, non-Title I plans, individual retirement accounts (IRAs), etc. This will help the firm to track disclosures, procedures, etc., that apply to each type of retirement investor.
- Make sure written policies and procedures for ERISA and other qualified retirement accounts such as IRAs and similar accounts (for example, Archer Medical Savings Accounts, HSAs, Coverdell Educational Savings Accounts, Keogh plans, and sole proprietor 401(k) plans) incorporate the Impartial Conduct Standards and require compliance with those standards in making recommendations to retirement accounts. Periodic compliance training for advisers may be appropriate. Compliance manuals and written supervisory procedures (as required by the Financial Industry Regulatory Authority (FINRA) Rule 3120 should be reviewed and updated.
- The DOL fiduciary rule became fully applicable on June 9, 2017. If not already done, your vendors should consider revising agreements to make clear the services for which the firm is and is not acting in a fiduciary capacity. Any registered representatives of broker-dealer firms should be licensed as investment adviser representatives, if not true already.
- Implement processes and controls for the delivery of nonfiduciary services to ensure that fiduciary advice is not inadvertently provided.
- If not already completed, service providers should review compensation structures and revenue streams to identify any potential conflicts.
- Implement steps to review recommendations to retirement accounts and conduct surveillance to ensure compliance with the best-interest standard.
- Review adviser compensation for recommendations to retirement accounts to ensure that it is reasonable in the context of your financial institution as a whole.
- Consider reviewing corporate compensation and individual adviser compensation against market benchmarks to understand where corporate and individual compensation is set compared with the market. Documenting the benchmarking process is important.
- Review use of proprietary products and investments that generate third-party payments in retirement accounts to make sure use of such products is consistent with the best-interest standard.
- Review all sales and marketing materials and disclosures with a view to identifying and eliminating any statements that could be viewed as misleading or inadvertently deemed to constitute a fiduciary recommendation.
- Review disclosures for retirement accounts to ensure that disclosures are accurate and fairly inform retirement investors of direct and indirect compensation received by the firm and its advisers and potential conflicts of interest.
- IRA rollovers are clearly a point of concern for the DOL and, to the extent your firm advises individuals on IRA rollovers, that activity should be treated as a fiduciary activity unless it can be clearly and conclusively established that the firm’s role is purely informational.
- Although internal documentation is not a technical requirement at the moment for IRA rollovers (and rollovers of similar accounts such as Archer Medical Savings Accounts, HSAs, etc.) under the BICE’s level fee exemption, firms should nevertheless consider maintaining records in support of the rollover decision.
- Make sure appropriate people (such as the chief compliance officer, general counsel, or their delegates) are made responsible—and do so by formal, written appointment—for overseeing compliance with the Impartial Conduct Standards.
- Consider reviewing how onboarding of discretionary accounts is handled. Under the fiduciary rule as currently in effect, what was formerly considered to be sales activity could be viewed as an investment recommendation to retain the firm for discretionary services. Use of “BICE for a Day”-type language (minus the private right of class-action lawsuit) in new or existing agreements could help cure this. Although this is not necessarily a point of emphasis for the DOL, it should not be ignored.
- Review existing fiduciary insurance and executive and officer policies to ensure persons responsible for compliance with the Impartial Conduct Standards are covered for the discharge of their duties. In addition, or alternatively, these individuals may be indemnified by the financial institution.
The DOL, Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC) will continue to share audit information and make cross-referrals under existing interdepartmental protocols. Regardless of the stated enforcement position of any of these regulatory bodies, a demonstrated effort to meet the Impartial Conduct Standards during this transition period (whether it ends in 2017 or a later date, as currently proposed) will be a powerful factor in a finding of compliance for the financial institution.
The presence of well-documented client files, formally adopted processes and procedures, evidence of attempts to adhere to such processes and procedures, and internal compliance training will be among the most impactful factors to demonstrate efforts to comply with the Impartial Conduct Standards.
|Marcia S. Wagner is the Managing Director of The Wagner Law Group, and she specializes in ERISA and employee benefits law. She is based in Boston.|
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Author: Marcia S. Wagner, Managing Director of The Wagner Law Group