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DOL Webinar: Your Fiduciary Rule Questions Answered – Part 2

Posted by Duane Thompson, AIFA®, Senior Policy Analyst, fi360, Inc. on November 03, 2015

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On Oct. 15, fi360 sponsored a webinar with an update on the Department of Labor’s proposed fiduciary rule.  Since we were unable to respond to all of the written questions posed by attendees, we are posting our responses here in this 2nd in a series of blogs.  The DOL is expected to issue a final rule during the first half of next year.

Keep in mind that the information provided below is for educational purposes, not as legal or compliance advice, and that the final rule will have some changes.  So with these caveats, here are our responses. 

1. [Under the proposed rule] if you had a flat fee for compensation, then you could include hedge funds, private equity or non-traded REITS?

That is generally correct.  The proposed rule’s restrictions on eligible investments are limited to those used in reliance on the Best Interest Contract Exemption (BICE).  For example, ‘level-fee advisors’ providing advice to IRAs or in connection with products available in brokerage windows of a 401(k) plan, would be limited only by the prudence standard of ERISA and other applicable requirements, such as the implied suitability obligation under the Investment Advisers Act of 1940 or FINRA Rule 2111.

However, depending on whether the DOL provides clarification in a final rule, it’s possible that BICE could be applicable to level-fee advisors giving rollover advice to a prospective client.

2. Upon the effective date of the rule, will existing IRAs be grandfathered?

The proposed rule provides a safe harbor for transactions made in accounts prior to the effective date of the new rule.  However, the Best Interest Contract Exemption (BICE) would apply to advice on those assets made after the effective date.

Some industry commenters expressed concern that the grandfather provision is, at best, unclear, and may, at worst, prohibit routine, ongoing services such as quarterly rebalancing services.  It is hoped that the Department will provide additional guidance in a final rule.

3. For the addition of DC plans under BICE, is the 100 participant number one that you have heard from DOL or just your best guess?

It is an educated guess, based in part on comments by DOL staff that it is looking at this request from industry groups.

4. Does this apply to fixed and variable investments?

If you are asking whether the definition of a fiduciary could apply to transactions involving annuity contracts, the answer is, “yes,” if the advice is directed to an IRA holder, DC plan participant, or DB plan with fewer than 100 participants.  If you are referring to BICE, the exemption would apply to variable annuities when the agent or her firm receives variable compensation for the advice.  Firms and agents receiving commissions for fixed annuity sales would be subject to a long-standing prohibited transaction exemption (PTE 84-24) under ERISA.   However, the DOL has beefed up this and other existing PTEs in the rule proposal by adding a new “impartial conduct,” or prudence standard that requires the agent to act in the client’s best interest.

5. What is the impact on nonqualified investments?

The DOL’s proposal would not affect taxable accounts.

6. Under BICE there was mention of onerous annual reporting requirements for plan costs and underlying fees.  Is this still the case?

Many of the industry comments focused on the annual reporting requirements under BICE.  Even some supporters of the rule concede that the reporting requirements are challenging.  Democratic legislators as well have strongly encouraged the Department to make the rule “operational.”  We believe that this is an area in which the DOL will pay special attention, as some officials have suggested in general statements that the rule will be “streamlined.”.

7. Why hedge funds?

Hedge funds are de facto excluded from the range of products available to advisors under BICE.  That comes out of the definition of “Asset” that, for purposes of the exemption, include only liquid and relatively easily valued investments such as mutual funds, CDs, exchange-traded REITs, bonds, and the like.  Hedge funds are part of a broad group of alternative investments excluded under the definition of Asset by virtue of being “a security future or a put, call, straddle, or other option or privilege of buying an equity security from or selling an equity security to another without being bound to do so.”

The Department does not provide a rationale why hedge funds or other alts are excluded.  However, a reasonable conclusion can be drawn that regulators in general consider alternative funds and other complex investment products to place investors at greater risk by requiring  additional due diligence, the fact that only accredited investors are eligible to invest in hedge funds, and that performance fees may be excessive in light of ERISA’s general requirement that fees be reasonable. 


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