Soft dollar arrangements appear to be doomed in regard to ERISA and IRA clients absent compliance with the BICE. Soft dollar benefits are described by the Securities and Exchange Commission as “the provision of research and other types of services to managed accounts by broker-dealers in consideration of compensation on portfolio transactions.” In practice, this generally is seen when advisors trade with a particular broker and, in exchange, that broker credits the advisor’s account with funds that are earmarked for the purchase of research or other items from a prescribed menu of options.
Soft Dollars and Level Fees
In the context of the fiduciary rule, soft dollar arrangements can sound the death knell for advisors seeking to utilize the streamlined level-fee fiduciary BICE. Under the streamlined BICE, advisors must provide a written statement of fiduciary status, adhere to standards of fiduciary conduct and, if necessary, prepare written documentation of the reasons for a 401(k) rollover recommendation. This is a much more palatable list of requirements for an advisor to adhere to, as opposed to the more arduous full BICE.
However, utilizing the streamlined BICE requires that the advisor be a — you guessed it — level-fee fiduciary. In order to qualify, the advisor must ensure that the compensation he or she receives in connection with advisory or management services to an ERISA plan or IRA is a fee based on a fixed percentage of the value of assets under management, or a set fee that does not vary with the particular investment recommended. However, the fiduciary rule also prohibits receipt of commissions, 12b-1 fees, revenue sharing or other payments beyond the level fee, as such compensation could create conflicts of interest for the advisor. This means that, as a threshold matter, advisors who receive soft dollar benefits cannot be considered level-fee fiduciaries and, as such, are subject to the full BICE requirements when dealing with ERISA assets.
Absent revisions to the rule or further guidance from the DOL, it currently appears that the most practical way to make soft dollar arrangements work in this context, while potentially permitting the advisor to maintain his or her status as a level-fee fiduciary, would be through the segregation of ERISA assets. By segregating ERISA assets, the advisor is ensuring that any transactions made with those assets would not result in the attribution of soft dollar credits to the advisor’s account. Such exercise will require corresponding communication to, and the cooperation of, custodians and broker-dealers with whom the advisor has a soft dollar arrangement so that there can be no misunderstanding as to which assets the advisor may seek to exclude from qualifying for a soft dollar benefit.