In the Dec. 5 DOL Digest article What’s Due When, we covered how the transaction disclosure and Best Interest Contract (BIC) language will be delivered to existing retirement accounts at two times through negative consent mailings: before the April 10 applicability date (transitional transaction disclosure) and before the Jan. 1, 2018, final implementation date (permanent transaction disclosure and BIC).
One of the greatest areas of confusion and concern for advisors has been how the DOL fiduciary rule applies to existing retirement accounts. The final rule includes a grandfathering provision that allows advisors and broker-dealers to continue receiving compensation from investments recommended to and made in existing accounts before April 10. The compensation from those transactions must be reasonable, without conflict of interest and level or, if unlevel, qualify for the Best Interest Contract Exemption.
The confusion comes from the DOL’s definition of a recommendation, which includes any communication suggesting the client take or not take a particular course of action – including buying, holding or selling a particular investment – that results in the advisor receiving compensation. For accounts opened before April 10, except for a few “carve outs” discussed below, any new recommendation made after April 10 must either use the BIC Exemption or not give rise to prohibited compensation.
To simplify things a bit, we’ll refer to any retirement account established before April 10, 2017, as an “existing account” and any money put into the account after April 10, 2017, as a “new investment.”
The grandfathering provision carves out three types of recommendations that, when made for an existing account, will not trigger a prohibited transaction due to non-level compensation. The recommendations must still be in a client’s best interest.
- New investments made through a systematic payment program that was established before April 10.
- Investment exchanges within a mutual fund family or variable annuity contract related to an exchange privilege or re-balancing program established before April 10. The recommendation cannot, however, result in the advisor or broker-dealer receiving any new or increased compensation.
- A hold recommendation.
Below are some examples of investments in existing accounts on which advisors could continue to receive compensation under the grandfathering provision:
- 12b-1 trails on investments purchased before April 10
- Periodic investment purchases (PIPs) established before April 10
- Dividend reinvestment program enrolled in before April 10
- Exchanges of investments within a mutual fund family or variable annuity if the exchange privileges or re-balancing programs were established before April 10
Below are examples of recommendations that if made in an existing retirement account that was grandfathered would cause the account to lose its grandfathering provision. These recommendations, when made after April 10, will therefore trigger the need for the account to qualify for the BIC for the advisor to continue to receive unlevel compensation.
• Additional investments made into existing products
• Changes to re-balancing programs in existing accounts
• Changes to an established periodic investment purchase plan
All existing accounts eligible for the BIC will receive a negative consent notification, probably in March 2017, stating that the account as it currently stands is grandfathered from the DOL requirements; if new recommendations are made, however, the BIC language in the negative consent notification will become effective. This concept of having language addressing both grandfathering and what happens if the grandfathering is lost is sometimes referred to as a “springing BIC” because it “springs” into effect when a new recommendation is made in an otherwise grandfathered account. Neither the advisor nor the client needs to take any further action to bring the new recommendation in the existing account under the BIC.
When you consider the limitations of the grandfathering provisions, the number of your accounts that fall under its protection may be relatively small. As a best practice, after April 10, treat all communications with retirement accounts as recommendations and ensure the accounts meet the BIC requirements if you plan to receive unlevel compensation. And remember – document, document, document!
If you have questions regarding the new DOL Fiduciary rule, please send an email to AsktheDOLexpert@Ladenburg.com.