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The First Set of DOL FAQs, Explained

The Department of Labor released the first of three frequently asked questions regarding its forthcoming fiduciary rule this week.

The Department of Labor released the first of three frequently asked questions regarding its forthcoming fiduciary rule this week. The FAQ addresses topics ranging from implementation for companies still coming into compliance, language of the Best Interest Contract exemption and how it effects advisor compensation, and when advisors have to comply with the conditions of the new exemptions.

“These questions are an important part of the regulatory process as they allow the department to clarify important parts of the rule, and head off misunderstandings that could lead to bad results for retirement savers, or financial services professionals,” said DOL assistant secretary Phyllis Borzi, in a blog post.

Here are some of the key takeaways for advisors:


  • The rule’s definition of fiduciary advice will go into effect on April 10, 2017; the BIC and principal transactions exemptions will also be available then. But the exemptions will have a transition period during which fewer conditions apply until Jan. 1, 2018, at which time the rule will be fully implemented. At that time, advisors—who choose to use the exemptions—will have to execute contracts.
  • During the transition period, advisors must comply with the “impartial conduct standards.” They must give advice in the “best interest” of their retirement plan clients; that advice must be based on “prudence”—meet a professional standard of care, and “loyalty”—in the interests of the customer.  Advisors can charge no more than reasonable compensation, and cannot make misleading statements about investment transactions, compensation and conflicts of interest.

Best Interest Contract Exemption

  • The BIC exemption covers recommendations made to retail investors, including recommendations on all categories of assets, IRA rollovers and recommendations on whom they should hire as investment advisors or managers.
  • If there is no recommendation and the transaction is client-driven, compliance with the BIC exemption is not required. The client, in that scenario, is not a fiduciary because they’re not being compensated for advice.
  • Charging an ongoing fee on assets-under-management does not raise prohibited transaction concerns, the DOL says. But this compensation structure could trigger conflicts of interest. “There is a clear and substantial conflict of interest when an adviser recommends that a participant roll retirement savings out of a plan into a fee-based account that will generate ongoing fees for the adviser that he would not otherwise receive, even if the fees going-forward do not vary with the assets recommended or invested.” In addition, switching a client from a commission- to fee-based account would trigger a prohibited transaction.
  • The BIC exemption does not cover advisors that have any discretionary authority or control with respect to the recommended transaction, unless it involves rolling over a participant’s account.
  • Firms can continue to pay advisors on an escalating grid structure if such structures are not intended to cause advisors to make recommendations that aren’t in the best interest of clients.
  • Robo advice is not covered under the BIC exemption.
  • The full BIC exemption doesn’t prohibit a financial institution or advisor from discounting prices paid by customers for service.
  • “Front-end” recruitment awards that aren’t contingent on asset movement or sales targets are permissible under the full BIC exemption. “Back end” awards that are expressly contingent on advisor achievements or sales targets are generally prohibited, unless carefully structured to avoid violating the new standards. Pre-existing contractual obligations to make such awards may still be honored, but the organization must adopt policies and procedures to specifically address the potential conflicts of interest that may arise.
  • Marketing oneself or a (disclosed) affiliate without otherwise making an investment recommendation covered by the Rule, doesn’t constitute investment advice, and as such may not result in a prohibited transaction.

Level Fee Fiduciaries

  • “Level fee fiduciaries” have access to streamlined compensation relief under the BIC exemption. They may receive only a “level fee” in connection with advisory or investment management services, and the fee must be disclosed in advance to the retirement investor. A “level fee” is compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that doesn’t vary with investment recommendations. This definition excludes commissions—even if the commission is set and does not vary based on the investment recommended—or other transaction-based fees.
  • In order to benefit from the level fee provision of the BIC exemption when rolling over an existing plan to an IRA, advisors must make diligent and prudent efforts to obtain information about the existing plan. If non-standard data has to be used, the institution should note its potential shortcomings and include a written explanation of how it determined the source was reasonable.
  • Financial institutions can rely on the streamlined provisions for “level fee” fiduciaries even if they offer other types of accounts, though they can only take advantage of the streamlined provisions for their “level fee” offerings.
  • A financial institution may still rely on the level fee provision of the BIC exemption to recommend a rollover from an employee benefit plan to an IRA, even if the advisor will become a discretionary manager of the assets after the rollover, as long as the advisor doesn’t have any discretionary authority or control with respect to the decision to roll over assets of the plans to an IRA.
  • Advisors can rely on the level fee provision when recommending that investors transfer from commission-based accounts to level fee accounts.
  • If an advisor recommends assets for which they receive third party payments (e.g. revenue sharing), then they can’t rely on the streamlined level fee provision and must abide by the more stringent full BIC exemption.


  • Insurance-only agents may continue to sell fixed-rate and fixed-indexed annuities to retirement investors after the Rule comes into effect, as long as they comply with the stated “impartial conduct standards.”
  • Insurance companies can also rely on independent insurance agents to sell annuities to retirement investors, though both agent and insurance company must abide by the new conduct standards.


  • Financial institutions may meet the “maintain an electronic copy of the required best interest contract on its website” standard by using a model contract. However, they do so at their own risk, as if any provisions in a client contract differ from those in the posted model contract, the institution will be in violation of the Rule. Best practice is for the company to maintain an accessible executed copy of the retirement investor’s individual contract on its website.
  • Financial institutions can amend existing best interest contract provision by negative consent if the proposed amendment is delivered to the investor prior to Jan. 1, 2018 and the investor does not answer within 30 days. No new obligations, restrictions or liabilities may be imposed through this method.
  • The transaction disclosure required under the full BIC exemption need not be provided in connection with a recommendation to hold or sell an investment product.
  • If a retirement investor requests disclosure of costs, fees or other compensation regarding transactions, then that information should be provided to the investor as of the date of the recommendation (though there’s nothing stopping the financial institution from also providing such information from subsequent dates in addition). This disclosure is not required to be made in $ or a % of AUM. The rule permits the disclosure to be made as a description of how compensation, fees and costs are calculated.


  • Dividend reinvestment programs “systemic purchase programs” are eligible for grandfathered relief under the BIC Exemption. Investment advice to sell an investment product qualifies as well.
  • There is a procedure to apply for an exemption for advice to engage in principal transactions involving assets that are not specifically covered by the Principal Transactions Exemption.

PTE 84-24

  • PTE 84-24 covers rollovers into an annuity.
  • Though the wording of PTE 84-24’s reasonable compensation standard differs from that used in the BIC Exemption, the two standards don’t differ substantively, and the DOL intends to interpret these provisions in the same way.


  • The general emphasis of the DOL during the transition period will be on assisting, rather than punishing, so long as institutions are working diligently and in good faith to comply.
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