Interesting Angles on the DOL’s Fiduciary Rule #31


Posted on December 22, 2016, by Fred Reish in BICE, Broker-Dealers, DOL Activity, fiduciary, prohibited transaction, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #31

“Un-levelizing” Level Fee Fiduciaries

This is my 31st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.

In the last article I posted, I discussed the three meanings of “Level Fee Fiduciary.” This article discusses the kinds of payments or benefits that will “un-levelize” a Level Fee Fiduciary.

As a starting point, the definition of compensation, for these purposes, includes any money or things of monetary value. So, it covers both cash and non-cash amounts. However, as the DOL explains, it must be directly or indirectly connected to a recommendation:

The term ‘‘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 purchase or sale of a security or the provision of investment advice services, . . . A fee or compensation is paid ‘‘in connection with or as a result of’’ such transaction or service if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service. [Emphasis added.]

In other words, if an adviser ordinarily charges a level fee (for example, 1% per year) for non-discretionary investment advice or discretionary investment management for plans, participants or IRAs, and receives any additional benefits or payments attributable to those services, the additional payments will un-levelize the adviser’s compensation and result in a prohibited transaction. (However, as explained in the last article, if the payments or benefits are offset dollar-for-dollar, the adviser will re-levelize his or her compensation.)

Some forms of additional compensation are obvious. For example, that includes commissions, 12b-1 fees, revenue sharing, trailing commissions, and so on. Others, though, are more subtle and, therefore, easier to overlook. Those could include trips, gifts, awards, reimbursements, marketing support, conference registrations, and so on. The DOL pointed to some of those payments in its definition of third party payments in the Best Interest Contract Exemption (BICE):

‘‘Third-Party Payments’’ include sales charges when not paid directly by the Plan, participant or beneficiary account, or IRA; gross dealer concessions; revenue sharing payments; 12b–1 fees; distribution, solicitation or referral fees; volume-based fees; fees for seminars and educational programs; and any other compensation, consideration or financial benefit provided to the Financial Institution or an Affiliate or Related Entity by a third party as a result of a transaction involving a Plan, participant or beneficiary account, or IRA. [Emphasis added.]

In the fiduciary regulation, the DOL gave additional examples of compensation as:

. . . including, though 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 representative’s new broker-dealer firm, gifts and gratuities, and expense reimbursements.” [Emphasis added.]

While advisers to retirement plans have, by and large, been aware of these rules, my experience is that advisers who focus primarily on wealth management, including advice to IRAs, are not familiar with the rules.

To paraphrase Hill Street Blues (for those of you old enough to remember that show) . . . Be careful out there.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

 







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