In the wake of the re-proposal by the U.S. Department of Labor of its so-called “Fiduciary Rule,” there are a number of questions regarding how the rule if adopted, will impact those providing financial advice to employee benefit plans and other retirement plans including IRAs and ERISA plans in general. The most obvious impact of the rule would be to bring those not currently fiduciaries, including registered representatives of securities broker-dealers and the broker-dealer firms themselves, into the realm of fiduciary advice providers. The higher standard of care that would apply necessarily implies a need for more thorough disclosures of potential conflicts of interest, including incentivized compensation such as commissions, 12b-1 fees and the like.
Within the proposal is an exemption called a “Best Interest Contract Exemption” (“BICE”). According to the Labor Department’s release, those providing advice to qualified clients could continue to charge commissions and share revenue as long as they enter into a “Best Interest Contract” that requires the firm to “contractually acknowledge fiduciary status, commit to adhere to basic standards of impartial conduct, adopt policies and procedures reasonably designed to minimize the harmful impact of conflicts of interest, and disclose basic information on their conflicts of interest and on the cost of the advice.” On its face, the BICE exemption would allow financial professionals to continue to receive commissions and other fees, even when the receipt of such compensation might potentially influence their recommendations, so long as the firm employs a contract acknowledging its fiduciary status in containing the other elements of the exemption. The key to compliance with the requirements of the BICE exemption would appear to be the need for full disclosure of all conflicts of interest. Only time will tell whether the Department of Labor interprets the BICE exemption to prohibit certain types of compensation as being not in the client’s best interests, regardless of what form of disclosure is used and whether that disclosure adequately alerts the client to the conflict. One example of what may be such an open question under the BICE exemption would be whether firms will be required to seek the lowest cost provider for a certain class of investment (such as index-based mutual funds) or whether, instead, the firm can take into consideration factors such as research, client relationship management services and other types of products or services typically provided by brokerage firms, as is typically permitted under the Investment Adviser’s Act concept of “Best Execution,” so long as these products and services are disclosed to the client and are periodically evaluated by the adviser.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.