Posted by Duane Thompson on May 10, 2016
A few weeks ago, we presented webinars covering the DOL’s recently released fiduciary rule. A recording of that webinar is now available. During that webinar we received over 80 questions. We were not able to answer all of those during the one hour session, but we have compiled and answered them here. The questions are categorized, and we will do separate blog posts to address all of the questions within a given category. These questions are not comprehensive of the rule, they only address the questions that were submitted. Think of them as an addendum to the webinar. For a more comprehensive view of the rule, we recommend you view the recording, as well as download our Executive Summary and Client Memo documents.
In our sixth Q&A blog post from the webinar, we are answering questions about BICE and other Prohibited Transaction Exemptions. Please note: the views expressed herein are strictly informational, do not represent an official position of fi360 on regulatory or legislative matters, and should not be relied upon as legal, compliance or investment advice.
Q: Can you summarize the purpose of the Seller's Exemption?
A: The purpose is to exempt from the fiduciary definition arms-length transactions in which the investment advice is incidental to the sale and the plan fiduciary has a degree of financial sophistication. The carve-out is available to transactions with plans sponsored by banks, insurance companies, BDs and RIAs. It is also available for incidental advice to plans with more than $50 million in assets. Among other things, the seller is also are required to disclaim fiduciary status and disclose that it is not providing impartial advice.
Q: If a new person is enrolled in an existing SIMPLE IRA or 403b after the rule is implemented, is BICE required for the new person that comes into the plan?
A: Partial compliance with BICE is required after Apr. 20, 2017, and full compliance after Jan. 1, 2018 if the advisor to the participant (not the plan) takes variable compensation for his advice. However, certain 403(b) plans are not subject to the Rule. Check with your compliance professional or attorney for details.
Q: With respect to the contract requirements for IRAs and non-ERISA plans under BICE, what content requirements are there? Or, are we creating the content of the contract as we go along?
A: The contract requirements generally include written acknowledgement of fiduciary status, agreeing to adhere to the Impartial Conduct Standards, and affirming that statements on compensation and other conflicts will not be misleading. Other disclosures such as how the client pays for services can be included in the agreement or a separate disclosure. The Level Fee Exemption under BICE does not require a contract. You should discuss these and other specific requirements with your attorney.
Q: Just to clarify the carve-out for Investment Education using an asset allocation model. If specific funds are being used within the core menu of investment options available, will this be deemed education?
A: Specific use of funds will be deemed “education” and not “advice” if certain conditions are followed. These include, among others, oversight by a plan fiduciary independent from the person who developed or markets the investment option and asset allocation model. In addition, all other investment options with similar risk and returns characteristics must be identified.
Q: What does BICE mean?
A: Best Interest Contract Exemption. BICE (sometimes called the BIC Exemption), provides a safe harbor for brokers receiving commissions or third-party compensation in providing investment advice. However, they must meet fiduciary conditions set out by the DOL.
Q: What type of swap are you referring?
A: The DOL rule provides a carve-out from the fiduciary definition for advice provided to a plan by a person who is a swap dealer, security-based swap dealer, or a swap clearing firm who meets certain conditions.
Q: What are your comments on the exemption for state-sponsored retirement accounts for small business employees such as California's Safe Accounts?
A: The DOL is working on a rule that would exempt the States and employers from ERISA’s fiduciary requirements.
Q: Which prohibited transactions occur most often?
A: In recent years, class-action suits under ERISA have alleged self-dealing by plan fiduciaries through revenue-sharing arrangements with service providers that are used to offset the cost of other corporate services provided by the TPA or record keeper.
Q: For the sellers carve-out, is providing a disclaimer in marketing materials and/or account opening documents that the firm is not a fiduciary sufficient?
A: No. The seller must “fairly inform” the plan sponsor that the seller is not undertaking to provide impartial advice or doing so in a fiduciary capacity. It doesn’t sound like burying something in a brochure would satisfy the disclosure requirement. There are several other conditions that apply.
Q: Under BICE, what is the means through which a broker is to communicate to the DOL when they are operating under BICE on a particular relationship?
A: The broker has no obligation to notify the DOL. However, her firm must notify the DOL the first time it intends to rely on BICE. Ongoing notification of each transaction is not required.
Q: How does BICE dovetail - or not - with the eligible investment advice provisions of the Pension Protection Act of 2006?
A: BICE dovetails with the PPA safe harbor only in the context that robo-advisors must use the PPA safe harbor and meet those conditions if the robo firm or an affiliate accepts variable compensation in connection with the advice arrangement. The Level-Fee Exemption is available to level-fee robos.