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.
Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration, 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.
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.
Another question: Is compliance with the BIC Exemption required as a condition of executing a transaction, such as a rollover, at the direction of a client in the absence of an investment recommendation?
Answer: No. In the absence of an investment recommendation, the rule does not treat individuals or firms as investment advice fiduciaries merely because they execute transactions at the customer’s direction. Similarly, even if a person recommends a particular investment, the person is not a fiduciary unless the person receives compensation, direct or indirect, as a result of the advice.
DOL noted, however, that if the firm or advisor does make a recommendation concerning a rollover or investment transaction and receives compensation in connection with or as a result of that recommendation, it would be a fiduciary and would need to rely on an exemption.
Another question: How about robo-advice? Is it covered by the BIC Exemption or other exemption?
Answer: The full BIC Exemption does not cover advice provided solely through an interactive website in which computer software-based models or applications provide recommendations based on personal information that the investor supplies without any personal interaction or advice from an individual advisor (i.e., robo-advice), DOL says.
However, DOL says that it did not make the full BIC Exemption generally available for such robo-advice based on its view that the marketplace for robo-advice is still evolving in ways that appear to avoid conflicts of interest that would violate the prohibited transactions provisions and that minimize cost.
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