As of the date of this writing, the future of the DOL “Fiduciary Rule” remains unclear. Judicial challenges remain, and the Trump administration has not yet expressed its view on whether the rule will be repealed (and how long that will take). Many broker-dealer and dual registrant firms have already spent millions to comply with the rule – but are they choosing the right path for compliance?
Some broker-dealer firms – both wirehouses and IBDs – will choose not to use the DOL’s Best Interests Contract Exemption (B.I.C.E.) and will move their clients (to the extent not grandfathered) to fee-based accounts. Yet, other broker-dealer firms have (e.g., Merrill Lynch, etc.) will embrace B.I.C.E., which contains a proverbial minefield of traps for both firms and their financial advisors.
Best Interests Contract Exemption
What does this mean for financial advisors in those firms that utilize B.I.C.E.? Here are my insights and legal analysis. I question why any financial advisor would want to use B.I.C.E., given the likelihood of significant reputational damage that would result for the advisor.
The U.S. Department of Labor issued its final “Conflict of Interest” (“C.O.I.”) regulation in April 2016, with the effective date of its core provisions on April 10, 2017. Under the C.O.I. regulation, fiduciary status is imposed on nearly everyone providing investment recommendations to ERISA-covered plan sponsors and plan participants, as well as to owners of IRA accounts, Keogh plan accounts and health savings accounts. While prohibited transaction exemptions (PTEs) (including the B.I.C.E.) permit the receipt of third-party compensation, as a practical matter firms – and their advisors – should transition to fee-based accounts. Anything less will result in significant reputational risk to advisors, as well as substantially increased litigation risk to both firms and advisors.
The 237 words of the impartial conduct standards
B.I.C.E. permits commissions, 12b-1 fees and other third-party compensation to be paid to broker-dealer firms. Much attention has been focused on the voluminous disclosures required under B.I.C.E.; some firms may wrongly believe that they can conduct “business as usual” simply by providing these disclosures. However, the core of the DOL’s rules are found in the 237 words that comprise the Impartial Conduct Standards. These standards impose strict fiduciary duties of loyalty and due care upon firms and advisors, require the receipt of only reasonable compensation, and prohibit misleading statements. And, these Impartial Conduct Standards also apply to recommendations of proprietary funds, principal trades and fixed-index annuities.
Best Interests Contract Exemption imposes upon both firms and their advisors an extremely strong fiduciary duty of “loyalty” that cannot be disclaimed by the firm or advisor, nor waived by the client
Under Best Interests Contract Exemption and its Impartial Conduct Standards, recommendations must be given to clients “without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”[1] “[F]or example, an advisor, in choosing between two investments, could not select an investment because it is better for the advisor’s or financial institution’s bottom line ….”[2] Moreover, neither the firm nor advisor may seek to limit its liability by disclaiming their core fiduciary duty or loyalty, nor may the firm seek to have the client waive the fiduciary duties owed to the client.[3]
By Ron A. Rhoades, JD, CFP®, read the full article here.
