The Department of Labor on Thursday released its widely anticipated frequently-asked-questions guidance on its fiduciary rule, answering 34 questions posed on new exemptions and amendments to existing exemptions.
Related: Final DOL fiduciary rule issued
Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration (pictured here), said Tuesday that the release of the first “wave” of FAQs was imminent and that EBSA anticipates releasing the FAQs in “three waves.” She noted that there could likely be “multiple waves” of FAQs.
Borzi said in a Thursday blog that the FAQs “are an important part of the regulatory process as they allow the department to clarify important parts of the rule, and head off misunderstandings that could lead to bad results for retirement savers, or financial services professionals.”
Making the answers public, Borzi continued, “is another example of our sincere efforts to work with the financial services industry to craft a rule that makes sense and works in the real world of investment advice.”
Other FAQs, Borzi said, will be published in the coming months.
The first FAQs note that in light of the importance of the fiduciary rule’s “consumer protections and the significance of the continuing monetary harm to retirement investors without the rule’s changes,” the April 10, 2017, applicability date is “appropriate and provides adequate time for plans and financial service providers to adjust to the change from non-fiduciary to fiduciary status.”
The FAQs address the applicability date of the new PTEs — the best interest contract exemption (BICE) and the principal transactions exemptions — as well as amendments to existing PTEs 75-1, 77-4, 80-83, 83-1 84-24, and 86-128.
Joshua Waldbeser of Drinker Biddle & Reath notes that, as anticipated, the FAQ includes “no significant surprises or reversals,” with most of the answers fleshing out “the general principles set forth in the exemptions.” (Photo: iStock)
One of the FAQs “confirms that volume-based commission grids can be permissible under BICE, if they’re structured appropriately,” says fiduciary attorney Joshua Waldbeser. “For example, it indicates that the size of the ‘steps’ should ideally be small, to prevent disproportionately large incentives as to any particular recommendation, and that the increases should ‘generally’ be applied prospectively only.”
The guidance also indicates that recruitment bonuses that are tied to “back-end” sales goals may be problematic under BICE, Waldbeser explains, “but that some transition relief will be available for these types of arrangements that are already in existence, where the institution is contractually bound to follow them.”
Many of the questions and answers focus specifically on BICE.
One query asks whether 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 advisor.
DOL’s answer: Yes. The BIC Exemption is broadly available for a wide variety of transactions relating to the provision of fiduciary advice in the market for retail investments. Under ERISA and the [IRS] Code, parties providing fiduciary investment advice to plan sponsors, plan participants and beneficiaries, and IRA owners, are not permitted to receive payments creating conflicts of interest unless they comply with a prohibited transaction exemption. Thus, if an advisor or financial institution receives compensation that creates such a conflict of interest (e.g., transaction-based payments such as commissions, or third party payments such as 12b-1 fees or revenue sharing), the transaction generally must meet the terms of an exemption
Related: What does it mean to be a fiduciary?