The DOL’s RFI and Possible Changes to BICE

This is my 54^th 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 and related developments in the securities laws.

The Department of Labor issued a Request for Information (RFI) about the fiduciary regulation and the prohibited transition exemptions. The questions in the RFI indicate the issues of greatest interest to the DOL and, in some cases, are suggestive of possible outcomes. This article looks at two issues concerning BICE–the Best Interest Contract Exemption.

The first question is about a possible extension of the transition rules, now scheduled to expire on December 31 of this year. The DOL asks:

“Would a delay in the January 1, 2018, applicability date of the provisions in the BIC Exemption, Principal Transactions Exemption and amendments to PTE 84-24 reduce burdens on financial services providers and benefit retirement investors by allowing for more efficient implementation responsive to recent market developments? Would such a delay carry any risk? Would a delay otherwise be advantageous to advisers or investors? What costs and benefits would be associated with such a delay?”

While it is always risky to make predictions, I think that the transition period will be extended, perhaps through the end of 2018.

As background, “transition” BICE requires only that the “financial institution”—e.g., the broker dealer or RIA firm—and the adviser “adhere to” the Impartial Conduct Standards (ICS). The ICS has three conditions: the best interest standard of care, no more than reasonable compensation, and no materially misleading statements. It is a conduct-based standard, and there aren’t requirements for written agreements or disclosure statements.

I believe that the DOL will find that those protections are adequate for the intervening period, as financial institutions transition to the new fiduciary regime, and that delaying compliance with additional requirements for contracts, disclosures, etc., will not negatively impact qualified investors in a material way.

Another set of BICE questions deals with the written contract and warranty requirements in the version of the exemption scheduled to apply on January 1 of 2018 (but likely to be delayed). The two requests for information are:

“5. What is the likely impact on Advisers’ and firms’ compliance incentives if the Department eliminated or substantially altered the contract requirement for IRAs? What should be changed? Does compliance with the Impartial Conduct Standards need to be otherwise incentivized in the absence of the contract requirement and, if so, how?

6. What is the likely impact on Advisers’ and firms’ compliance incentives if the Department eliminated or substantially altered the warranty requirements? What should be changed? Does compliance with the Impartial Conduct Standards need to be otherwise incentivized in the absence of the warranty requirement and, if so, how?”

The outcome on these issues is less clear. The DOL needs to balance the burdens of compliance with protection of retirement investors. For example, the cost, complexity and possible litigation implicit in those requirements could cause financial institutions to limit the range of investments and/or to increase their charges to investors. On the other hand, how will IRA retirement investors obtain relief if there was a breach of the best interest standard of care? While plans and participants can file claims under ERISA, retirement investors in IRAs don’t have a similar statutory right.

Those are complicated issues and there will certainly be comments by both pro-industry groups and pro-investor organizations. While I can’t predict the outcome, I believe that the DOL will try to balance those considerations, with the objective of providing retirement investors with access to a wide range of investments without increasing their costs, but at the same time providing an opportunity for enforcement of the best interest standard of care.

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