Conflicts of Interest | Department of Labor | DOL Fiduciary Rule | ERISA | Fiduciary

Q and A from Webinar on DOL’s New Fiduciary Rule



Questions & Answers from

Webinar on:

DOL Conflicts of Interest Rule Impact on Investment Advisers

June 15, 2016

  1. Does BICE apply when an adviser has a mutual fund and the reps are receiving compensation for selling the fund?

Answer:  Let’s break this down into two scenarios.  The first scenario involves a mutual fund and a registered representative (RR) of a broker-dealer that is not affiliated with the adviser or the mutual fund.   The mutual fund is not prohibited from compensating registered representatives of a broker-dealer for selling the fund.  BICE applies in situations where the fiduciary (i.e., the adviser) is providing advice to a retirement investor, such as a 401(k) plan, plan participants and beneficiaries, or an IRA.  BICE does not apply to the adviser in this situation, since the adviser (to the fund) is not making a recommendation to invest in the fund.  The RR of a broker-dealer can still receive compensation for selling the fund, however, if the RR is making a recommendation to the retirement investor to purchase the fund; then, the RR becomes an ERISA fiduciary and would have to comply with BICE. The burden is on that rep to ensure that it is complying with the DOL’s Conflict of Interest Rule and BICE.

The second scenario involves a mutual fund and an investment adviser representative (IAR) of a registered investment adviser (RIA).  An IAR is a fiduciary with respect to his/her clients.  An IAR can recommend an investment in a mutual fund to his/her clients and receives any additional compensation (referral fees or any other fees from a third party), as long as the payments are disclosed in the RIA’s Form ADV.

However, if any of those clients are retirement investors, such as a 401(k) plan, plan participants and beneficiaries or IRAs, then disclosure is not going to be enough.  Generally, receipt of such payments would be considered a prohibited transaction since the RIA/IAR is using fiduciary authority to receive additional compensation from a plan investment—the revenue payment from the mutual fund.  In that situation, the RIA/IAR would have to comply with BICE.  This would be true whether the RIA was the adviser to the mutual fund or not.

  1. If my reps are not selling our mutual fund to ERISA plans or IRAs then I don’t have to worry about BICE and these disclosure requirements? 

Answer:  If you are an RIA and you are talking about your IARs recommending the purchase of mutual funds managed by your firm, then the answer is yes.  If you are not giving investment advice to retirement plan investors, then you do not have to comply with BICE.

3.  Do RIA’s need to update their ERISA Fiduciary Fidelity Bonds to cover IRAs?

Answer:  As a general matter, I would recommend contacting your insurance company to determine whether you need to increase your coverage.  It is my understanding that an IRA is not an employee benefit plan under ERISA and the bonding requirements only apply to ERISA benefit plans.

  1. Can you make the distinction between fee-only RIAs who have always been fiduciaries?

Answer:  All RIAs are considered fiduciaries.  RIAs that typically receive fees based solely on assets under management, or flat fees (“Level Fee Fiduciaries”), are still affected by the DOL’s new Conflict of Interest Rule.  If the RIA advises a client that wishes to rollover his/her assets from an employer-sponsored 401(K) plan (or take a distribution) to an IRA and the RIA advises the client with respect to that rollover (or distribution, as the case may be), the RIA is subject to the Conflicts of Interest Rule, since now this advice is considered fiduciary advice under ERISA.  Additionally, if an RIA advises a client to change from one type of IRA to another (such as from a commission-based account to a fee-based account), the new Conflict of Interest Rule comes into play.

In these situations, the Level Fee Fiduciary has to comply with BICE, but is subject to the less rigorous “Streamlined BICE” which requires a written statement of fiduciary status, compliance with the standards of impartial conduct, and, as applicable, documentation of the specific reason or reasons for the recommendation of the Level Fee arrangement.

5.    What about an IRA rollover when the fees are less?

Answer:  If the RIA recommends an IRA rollover to a retirement investor, the new Conflict of Interest Rule and BICE still apply.  The bottom line is that if a client stays in an employer-sponsored 401(k), an RIA will generally not make money on those assets.  Therefore the RIA has an inherent conflict of interest in recommending any IRA, since once the assets are rolled over, the RIA will receive a fee based on assets under management.

  1. If an investment adviser manages a hedge fund and relies on the 25% “insignificant participation test” safe harbor to avoid being subject to ERISA, does the new DOL rule apply to the investment adviser at all? If the fund accepts individual IRAs as investors, would the adviser have to rely on BICE or are there other exemptions?

Answer:  The new rule may not affect you; however, you should be careful not to provide a “recommendation” to any potential investors in the fund.  You should consider including representations in the subscription agreement stating:

  • the owner understands and agrees that the fund manager is not offering impartial fiduciary advice;
  • the owner has sufficient financial expertise to make the decision to invest; and
  • the owner understands and agrees that fund manager is not providing specific advice or a recommendation as to whether the owner should invest in the fund.
  1. How does an RIA easily obtain cost/fee information on the plan from which the potential rollover may be coming from in order to document the internal file that the rollover is in the best interest of the client?

Answer:  The client should be able to provide you with disclosures related to the plan.  Participants in a 401(k) plan (or other plans subject to ERISA) are required to receive an annual disclosure from the plan sponsor under Regulation 404a-5 of ERISA.  The annual disclosure has to include:  designated investment alternatives, any administrative service fees charged against participant accounts (e.g., recordkeeping fee), and any fees charged on an individual basis (e.g., loan fee).  The disclosure should also include a chart that provides a side-by-side comparison of the designated investment alternatives in the plan menu that includes: (1) type or category of investment, (2) performance and benchmark data, and (3) fee and expense information. Participants are also provided with an Internet website address that provides access to information regarding each designated investment alternative (DIA) including:  (1) DIA’s issuer, (2) investment objectives and principal strategies, (3) portfolio turnover rate, (4) updated quarterly performance data, and (5) fees and expenses.

8.  What is required on the website if you are a Level Fee RIA?

Answer:  If you are a Level Fee Fiduciary (meaning that the fees or compensation you receive are based on a fixed percentage of the value of the assets, or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee), then you are not required to have a website under the requirements of Streamlined BICE.

9.  When does BICE come into play?

Answer:  BICE comes into play when you provide investment advice to ERISA plans or IRA, and other non-ERISA plans, including defined contribution plans, health savings accounts (“HSAs”), certain 403(b) plans, Keoghs, Savings Incentive Match Plans for Employees (“SIMPLEs”), SIMPLE‐IRAs, and Simplified Employee Pensions (“SEPs”).

Investment advice means any recommendations of acquiring, holding, disposing of, or exchanging securities or other investment property or how to invest after a rollover, transfer, or distribution from a plan or IRA; or recommendations as to management of securities or other investment property.  The DOL has stated that investment advice is any communication that “based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”

BICE comes into play even when an RIA only charges Level Fees (described in previous questions), if that RIA advises clients on rolling over employer-sponsored 401(k) assets or how to invest distributions from a 401(k).  BICE also comes into play if the RIA advises a client to switch from one kind of IRA (commission-based) to another (fee-based).

Level Fee Fiduciaries can comply with Streamlined BICE, whereas any other entities providing investment advice to retirement investors that receive other types of payments, such as referral payments, commissions, or other third-party compensation, are required to comply with full-blown BICE.

  1. When does the Rule go into effect?

Answer:  The Conflict of Interest Rule applies (meaning it firms need to comply with it) on April 10, 2017.  Firms that are relying on BICE, however, are given additional time to comply with the conditions of the exemption, i.e., a transition period.  From April 10, 2017 through January 1, 2018, a firm relying on BICE has to comply with the “Impartial Conduct Standards”, provide a notice to retirement investors that, among other things, acknowledges its fiduciary status and describes its Material Conflicts of Interest, and designate a person responsible for addressing Material Conflicts of Interest and monitoring advisers’ adherence to the Impartial Conduct Standards.

The rest of the conditions of BICE (e.g., website, policies and procedures, amending contracts) apply in January 2018.

11.  So if you have any ERISA or IRA clients, then BICE automatically applies even if you just get a fee based on assets under management?

Answer:  The answer is….Maybe.  If you provide advice to ERISA plans and do not receive any other compensation aside from your advisory fee, then BICE would not come into play.  If you advise clients as to how to invest 401(k) distributions, or their options if they wish to roll over their 401(k) assets into an IRA, then BICE would come into play.  If you do not receive any other compensation in connection with the advice provided to ERISA or IRA clients, you can comply with the less onerous “Streamlined BICE.”

  1. I guess I need clarification on “advisers offering other products, receiving other payments with respect to IRAs, have to find an exemption.

Answer:  The basic principle is that a fiduciary, like an RIA, cannot use its authority to cause itself or an affiliate to receive additional compensation or to receive compensation from a third party in connection with transactions involving ERISA plan assets (or IRA assets).   This is considered self-dealing.

For example, if an adviser offers insurance products as well as investment products to an IRA client and receives a commission on the sale of those products, this would generally be viewed as a prohibited transaction under ERISA. Therefore, in order to receive this commission, the RIA needs to rely on an exemption from the prohibited transaction rules.  There is a prohibited transaction exemption, PTE 84-24 that applies to insurance contracts.  An IAR can receive a commission on the sale of an insurance contract to an IRA or ERISA plan, if the conditions of this exemption are met.  The investment advisory representative must acknowledge in writing that he/she is a fiduciary and must agree to adhere to the best interest standard of care.

Another example of an adviser receiving “other payments” includes referral fees.  If an adviser receives a fee for recommending another adviser or a mutual fund that provides that RIA with a referral fee, then the adviser would need to comply with BICE in order to continue receiving those fees.

The biggest effect will undoubtedly be on broker-dealers, who may now be subject to ERISA fiduciary liability for providing “investment advice” to ERISA plans and IRAs.  In order to continue receiving commissions, broker-dealers will now have to comply with BICE.

  1. If you are an investment adviser that does not provide advice on 401k rollovers, then the only effect of this DOL rule is the fact that we are now fiduciaries for IRA accounts in addition to the ERISA accounts that we were already fiduciary for. Correct?  

Answer:  That is correct.

  1. How is advice defined? If an investment adviser offers but does not recommend one of several investment strategies, or portfolios, in which an SMA or WRAP program client can invest a portion of their funds, is the offer considered to be advice?

Answer:  If you are an investment adviser that receives a fee based on assets under management, you will be considered to be providing investment advice to that account.   So even if you are simply “offering” a number of different investment options, this would still be considered investment advice according to the DOL.

More technically, the new rule defines investment advice as:

  • recommendations as to the advisability of purchasing or holding securities or other investment property, including recommendations as to how proceeds from rollovers and distributions should be invested, and
  • advice with respect to the management of securities or other investment property, including, but not limited to recommendations:
    • of other persons who provide advice or management services,
    • as to whether to select a brokerage or advisory account arrangement,
    • with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, and in what form, and to what destination, the rollover, transfer, or distribution should be made.
  1. How does level fee apply if the RIA charges a different fixed fee depending upon the investment product? For example, we could charge 40 bps for equity products and 25 bps for fixed income products.  Is this RIA still considered to be “level fee”?Answer: 

Although the DOL did not specifically address this issue, my guess is that this would not be considered to be a “level fee” since the adviser’s compensation changes depending on the type of investment being offered.

As defined in BICE, a Financial Institution and Adviser are “Level Fee Fiduciaries” if the only fee received by the Financial Institution, the Adviser and any Affiliate in connection with advisory or investment management services to the Plan or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. A “Level Fee” is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee.

  1. Can my RIA firm conduct co-marketing events with a service provider/money manager and have the service provider/money manager pay for the event?

Answer:  This is not clear, and we may want to wait and see if the DOL provides any guidance on this issue.

In the Final Release of the rule, the DOL discussed what it meant by “fee or other compensation, direct or indirect,” clarifying that this means any explicit fee or compensation for the advice received by person rendering the advice (or an affiliate) from any source, including but not limited to, commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representatives new broker-dealer firm, gifts and gratuities, and expense reimbursements.  The fee or compensation has to be paid “in connection with, or as a result of” advice given, meaning that the fee or compensation would not have been paid but for the recommended transaction, or “if eligibility for or the amount of the fee or compensation is based,  in whole or in part, on the transaction or service.”[1]

It could be argued that having a service provider such as a mutual fund company pay for an event held by an RIA may not be considered “indirect compensation”, assuming that the payment was not tied to the amount of business the RIA placed with the mutual fund company.  However,  if the payment by the service provider is conditioned upon the RIA placing a certain amount of business with that service provider, then the payment would be considered “indirect compensation,” requiring advisers that accept such compensation to comply with BICE.

  1. Can I attend an education or training event provided by and paid for by a service provider/money manager?

Answer:  The analysis of this problem is similar to the previous response.  An IAR or employee of an RIA can attend a training event provided by and paid for by a service provider/money manager.  The real issue is whether the provision of the training would be considered indirect compensation requiring an RIA to comply with BICE.  Consider a situation where an RIA is a Level Fee Fiduciary, and participates in training paid for by a mutual fund company.  If the RIA recommends the mutual funds offered by that company to its retirement clients, would this participation essentially kick the RIA out of the “Level Fee Fiduciary” category?  Would the RIA have to comply with BICE?

The answer is not clear.  The rule discusses fees or compensation received from any source “in connection with or as a result of the recommended purchase or sale of a security or the provision of investment advice services.”  Again, this is probably an analysis that depends on the facts and circumstances.  If the RIA has to fulfill any quotas before any of its IARs can participate in such a program, I would consider the offered training as indirect compensation related to the purchase or sale of securities.  Conversely, if the training is offered to all RIAs that offer these mutual funds, or offered to any new RIA offering such funds, then it could be argued that this is not compensation “in connection with” the recommended purchase or sale of a security.

The DOL may provide some additional guidance on this issue.

  1. How does the rule apply when I recommend that a client change his/her account from one RIA service/product that I provide to another RIA service/product that I provide? For example, I recommend that a client change from an account that uses a TAMP (turnkey asset management program) to an account that my firm will manage directly.  In doing so the client’s total fee will change and my firm’s compensation will change.  In both cases my firm’s fee will be a percentage of AUM.

Answer:  This is another question where the answer is “it depends.”  The adviser in this situation has to determine that the recommendation is in the best interest of the client with retirement assets, otherwise the adviser could violate ERISA’s self-dealing prohibition that could not be cured by compliance with BICE.

For example, if an RIA has been purchased by a larger firm with the capacity to manage accounts more effectively than by using a TAMP, then it is possible that the change would be in the best interest of the client, assuming the RIA now can offer the services at a lower overall price, or with more features and investment alternatives.

There would have to be documentation showing that the RIA has made a reasonable determination that the change in the type of account/services is in the best interest of the client with retirement assets.  For example, if the client’s needs have changed, a different product may be better suited to meet his/her new investment goals.  Alternatively, the investment adviser determines that the TAMP is charging a greater than market rate or not providing adequate service.  In that situation, it may be appropriate to recommend a different service/product to the client.

  1. What exactly can I tell a potential client before I cross the line and become a fiduciary?

Answer:  It really depends on the facts and circumstances.  An RIA can provide marketing materials that discuss the products and services the firm offers (the “Hire Me” exemption), and general investment advice and education about investing (the “education exemption”).  General communications would also not be considered fiduciary advice, if a reasonable person would not view the communication as investment recommendations, including newsletters, commentary in talk shows, remarks and presentations in widely attended speeches and conferences, research or news reports prepared for general distribution, general marketing materials, general market data including data on market performance, market indices, or trading volumes, price quotes, performance reports, or prospectuses.

Once an RIA starts providing more specific recommendations geared toward that particular client’s needs, then the RIA is getting into “advice” territory.  For example, with respect to rollovers, an RIA can provide distribution education, such as discussing distributions options, explain the material considerations for each option, as long as the adviser does not recommend a particular option.  This would be considered education, as opposed to advice.

  1. Will I be acting as a fiduciary if I offer advice to a client on their employer plan but do not charge them a fee for the service?

Answer:  Maybe not.  It depends whether the RIA receives a fee in connection with this advice from any other source.  Even though the client may not pay a fee for these services, if the RIA receives a commission, 12b-1 fee, shareholder servicing fee or other fee from a third party in connection with providing this advice, then the firm could be found to be acting as a fiduciary.

If, however, the RIA provides advice to client on how to invest that client’s 401(k) assets, but receives no fee in connection with this advice, the RIA would not be considered to be a fiduciary with respect to those 401(k) assets.

  1. Does the rule apply if I recommended a client take an IRA distribution?

Answer:  Yes.  However an RIA can provide distribution education, such as discussing distributions options, explaining the material considerations for each option without becoming a fiduciary, as long as the adviser is not biased towards a particular option.  Recommendations on how to invest that distribution, such an in an IRA managed by the RIA, would cross the line.  If the advice is specific enough so that the recipient feels he/she has received a “call to action,” then this would be considered fiduciary advice.  Once that line is crossed, the RIA has to comply with BICE.

  1. What is the “Hire Me” exception and what are considered recommendations?

 Answer:   See response to question 19.

  1. What are the consequences for an investment adviser who make a recommendation to a potential client, the potential client does not ultimately become a client but acts on the recommendation of the adviser?  For example, an adviser recommends that the potential client rollover her IRA. The potential client doesn’t sign an investment management agreement with the adviser, but acts on the recommendation and rolls over her IRA, and she doesn’t like the outcome.

 Answer:   It is possible that there may be no consequences, assuming that the failure to enter into the contract is not part of a firm’s strategy to evade the contract requirement.

The new Rule provides that a person is a fiduciary when that person provides investment advice for a fee or other compensation, direct or indirect. In this situation described above, the adviser has not received a fee or any other compensation with respect to this advice.   As defined in the Rule, “fee or other compensation, direct or indirect” means any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the recommended purchase or sale of a security or the provision of investment advice services.

BICE also discusses this situation.  Section II(a)(1)(iii) provides conditions under which the exemption BICE is available, even though an adviser has not entered into a contract with a retirement investor.  Here is a summary:

  1. The individual adviser making the recommendation may not receive compensation, directly or indirectly, as a result of the recommendation or the retirement investor’s investment transaction. This would include transaction-specific compensation, such as a commission or 12b-1 fee, that is tied to the investment.
  2. The investment adviser’s firm must have policies and procedures that prohibit the firm, its affiliates and related entities, from providing compensation to the individual adviser in lieu of the compensation that he/she would have received if the client had entered into the contract. This would include bonuses or prizes or other incentives, and the firm has to monitor such policies and procedures.
  3. The individual adviser and the firm must comply with the Impartial Conduct Standards, the policies and procedures requirements of Section II(d) (except for the requirement of a warranty with respect to those policies and procedures), the web disclosure requirements of Section III(b) and, as applicable, the conditions of Section IV(b)(3) – (6) (Conditions for Advisers and Financial Institution that restrict recommendations, in whole or part, to Proprietary Products or to investments that generate Third Party Payments) with respect to the recommendation.
  4. The firm’s failure to enter into the contract must not be part of a scheme by the firm or the individual adviser to circumvent compliance with BICE.


[1] 81 FR 20989