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Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17

Much attention has been given to the new fiduciary rules (applicable April 10, 2017) for recommending distributions from retirement plans and rollovers to IRAs. Where the adviser making the recommendation is a “Level Fee Fiduciary,” the new requirements are sometimes referred to as “BICE-lite,” because only certain of the requirements of the Best Interest Contract Exemption must be satisfied. However, where the adviser will not be a Level Fee Fiduciary, the adviser and his Financial Institution (e.g., broker-dealer or RIA) must comply with all of the BICE conditions.

However, not much attention has been paid to the other BICE-lite recommendations—a recommendation to transfer an IRA from another adviser and a recommendation to change from a transaction-based account to a fee-based account. This article discusses the first of those two . . . a recommendation to transfer an IRA.

The starting point is to know that the fiduciary regulation says that a recommendation to transfer an IRA is a fiduciary act. More specifically, it says that fiduciary acts include:

“…recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.”

The next step is to understand that the recommendation will almost necessarily result in a financial conflict of interest, which the Internal Revenue Code refers to as a prohibited transaction. In other words, a receipt of compensation as a result of the recommendation is prohibited. Fortunately, though, there is an exception, which the Code calls an exemption, that if its conditions are satisfied, allows the adviser to receive compensation on a transferred IRA. The exemption is BICE.

BICE-lite has several requirements, including that the adviser receive only reasonable compensation, that no misleading statements be made, and that the recommendation to transfer the IRA satisfy the best interest standard of care. However, the most demanding requirement is that the adviser document why the recommendation is in the best interest of the investor. (More accurately, BICE-lite requires that the Financial Institution—for example, the broker-dealer or RIA firm—document why the recommendation is in the best interest of the investor.) To quote from the exemption:

“…in the case of a recommendation to rollover from another IRA or to switch from a commission-based account to a level fee arrangement, the Level Fee Fiduciary documents the reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee.”

In doing the analysis to determine whether the recommendation is in the IRA owner’s best interest, BICE specifically requires that the adviser consider the services offered in the existing IRA and the services that the adviser will offer in the new IRA. In that regard, it would be risky to document the “best interest” recommendation without some specific consideration of the services. However, that is not the end of the story. The rule more generally requires that the adviser act in the best interest of the IRA owner, which could involve other considerations. For example, the general rule for a prudent process is that the fiduciary adviser consider the “relevant” factors. (Those are the factors that a hypothetical knowledgeable person would want to review in making the decision.) The best interest standard also requires that the adviser consider the needs, circumstances, objectives and risk tolerance of the IRA owner.

So, what does all of that mean? While there could be a number of ways of satisfying the requirements, I believe that one way—and probably a good way—is to have procedures, forms and services for gathering and evaluating the information and for documenting why the analysis of that information results in a recommendation that the transfer (or not transferring) is in the best interest of the IRA owner.

Also, while BICE does not specifically discuss the analysis that needs to be made if the adviser will not be providing “Level Fee Fiduciary” advice to the IRA, the logical conclusion would be that the requirements are the same (in addition to satisfying the other conditions of BICE that do not apply to Level Fee Fiduciary advice).

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

Part 1- Interesting Angles on DOL’s Fiduciary Rule #1

Part 2 - Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2 

Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3

Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles on DOL’s Fiduciary #4

Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5

Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6

Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7

Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8

Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9

Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10

Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11

Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12

Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13

Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14

Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15

Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16

Part 18- Best Interest Contract Exemption and IRA Advisor Compensation: Interesting Angles on the DOL’s Fiduciary Rule #18

Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.

Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20

Part 21- Retirement Plan Documentation and Prudent Recommendation: Interesting Angles on the DOL’s Fiduciary Rule #21

Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22

Part 23-Prohibited Transactions: IRA and RIA Qualified Money: Interesting Angles on the DOL’s Fiduciary Rule #23

Part 24 - Differential Compensation Based on Neutral Factors: Interesting Angles on DOL’s Fiduciary Rule #24

Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25

Part 26- Interesting Angles on the DOL’s Fiduciary Rule #26- Reasonable Compensation for IRAs: When and How Long?

Part 27 - Definition of Compensation: Interesting Angles on DOL’s Fiduciary Rule #27

Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28

Part 29- Capturing Rollovers: What Information is Needed?: Interesting Angles on the DOL’s Fiduciary Rule #29

Part 30- Three Kinds of Level Fee Fiduciaries . . . and What’s A “Level Fee?”: Interesting Angles on the DOL’s Fiduciary Rule #30

Part 31 - “Un-levelizing” Level Fee Fiduciaries: Interesting Angles on the DOL’s Fiduciary Rule #31

Part 32 - What “Level Fee Fiduciary” Means for Rollover Advice: Interesting Angles on the DOL’s Fiduciary Rule #32

Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33

Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34

Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35

Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36

Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37

Part 38- SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative: Interesting Angles on the DOL’s Fiduciary Rule #38

Part 39- FINRA Regulatory Notice 13-45: Guidance on Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #39

Part 40 - New Rule, Old Rule - What Should Advisers Do Now?: Interesting Angles on the DOL’s Fiduciary Rule #40

Part 41 - While We Wait: The Current Fiduciary Rule and Annuities: Interesting Angles on DOL’s Fiduciary Rule #41

Part 42 - Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42

Part 43 - BICE Transition: More Than the Eye Can See - Interesting Angles on DOL’s Fiduciary Rule #43

Part 44 - Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44

Part 45 - DOL Fiduciary “Package”: Basics on the Prohibited Transaction Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #45

Part 46 - How Does an Adviser Know How to Satisfy the Best Interest Standard?: Interesting Angles on the DOL’s Fiduciary Rule #46

Part 47- “Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47

Part 48- The Last Word: The Fiduciary Rule Applies on June 9- Interesting Angles on the DOL’s Fiduciary Rule #48

Part 49- The Requirement to Disclose Fiduciary Status: Interesting Angles on the DOL’s Fiduciary Rule #49

Part 50- Fourth Impartial Conduct Standard: Interesting Angles on DOL’s Fiduciary Rule #50

Part 51- Recommendations to Transfer IRAs: Interesting Angles on the DOL’s Fiduciary Rule #51

Part 52 - The Fiduciary Rule and Exemptions: How Long Will Our Transition Be?: Interesting Angles on the DOL’s Fiduciary Rule #52

Part 53 - Fiduciary Rule and Discretionary Investment Management: Interesting Angles on DOL’s Fiduciary Rule #53

Part 54 - The DOL’s RFI and Possible changes to BICE: Interesting Angles on the DOL’s Fiduciary Rule #54

Part 55- DOL’s RFI and Recommendation of Annuities- Interesting Angles on DOL’s Fiduciary Rule #55

Part 56-Recommendations of Contributions as Fiduciary Advice: Interesting Angles on the DOL’s Fiduciary Rule #56

Part 57- Relief from 408(b)(2) Requirement on Change Notice: Interesting Angles on the DOL’s Fiduciary Rule #57

Part 58- Recommendations to Contribute to a Plan or IRA- Interesting Angles on the DOL’s Fiduciary Rule #58

Part 59- What Plans and Arrangements Are Covered by the Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #59

Part 60- What the Tibble Decision Means to Advisers: Interesting Angles on the DOL’s Fiduciary Rule #60

Part 61- The Fiduciary Rule, Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #61

Part 62 - Is It Possible To Be An Advisor Without Being A Fiduciary? - Interesting Angles on the DOL’s Fiduciary Rule #62

Part 63-Policies and Procedures: The Fourth BICE Requirement - Interesting Angles on the DOL’s Fiduciary Rule #63

Part 64 -What Does the Best Interest Standard of Care Require?-Interesting Angles on the DOL’s Fiduciary Rule #64

Part 65- Unexpected Consequences of Fiduciary Rule - Interesting Angles on the DOL’s Fiduciary Rule #65

Part 66- Concerns About 408(b)(2) Disclosures: Interesting Angles on the DOL’s Fiduciary Rule #66

Part 67- From the DOL to the SEC - Interesting Angles on the DOL’s Fiduciary Rule #67

Part 68-Recommendations of Distributions - Interesting Angles on the DOL’s Fiduciary Rule #68

Part 69- Compensation Risks for Broker-Dealers and RIAs: Interesting Angles on the DOL’s Fiduciary Rule #69

Part 70-The Fiduciary Rule and Recordkeeper Services: Interesting Angles on the DOL’s Fiduciary Rule #70

Part 71- Recordkeepers and Financial Wellness Programs: Interesting Angles on the DOL’s Fiduciary Rule #71

Part 72-The "Wholesaler" Exception: Interesting Angles on the DOL’s Fiduciary Rule #72

Part 73- Recordkeeper Investment Support for Plan Sponsors: Interesting Angles on the DOL’s Fiduciary Rule #73

Part 74 -One More Fiduciary Issue for Recordkeepers: Interesting Angles on the DOL’s Fiduciary Rule #74

Part 75 - The Fiduciary Rule: Mistaken Beliefs-Interesting Angles on the DOL’s Fiduciary Rule #75

Part 76 - Discretionary Management of IRAs: Prohibited Transaction Issues for RIAs- Interesting Angles on the DOL’s Fiduciary Rule #76

Part 77 - The Fiduciary Rule: Mistaken Beliefs (#2): Interesting Angles on the DOL’s Fiduciary Rule #77

Part 78 - The Fiduciary Rule: Mistaken Beliefs (#3): Interesting Angles on the DOL’s Fiduciary Rule #78

Part 79 - The Fiduciary Rule: Mistaken Beliefs (#4)- Interesting Angles on the DOL’s Fiduciary Rule #79

Part 80 - Enforceable During Transition?: Interesting Angles on the DOL’s Fiduciary Rule #80

Part 81 - The Fiduciary Rule Prohibits Commissions...  or Not (Myth #6): Interesting Angles on the DOL’s Fiduciary Rule #81

Part 82 - Undisclosed (and Disclosed) 12b-1 Fees: The Different Views of the SEC and DOL - Interesting Angles on the DOL’s Fiduciary Rule #82

Part 83 - Part 2 of Undisclosed (and Disclosed) 12b-1 Fees: Interesting Angles on the DOL’s Fiduciary Rule #83

Part 84- What Does the 5th Circuit Decision Mean for Rollover Recommendations?: Interesting Angles on the DOL’s Fiduciary Rule #84

Part 85 -The Fiduciary Rule: What’s Next (Part 1)? : Interesting Angles on the DOL’s Fiduciary Rule #85

Part 86- The Fiduciary Rule: What’s Next (Part 2)?: Interesting Angles on the DOL’s Fiduciary Rule #86

Part 87 - The Fiduciary Rule: What’s Next (Part 3)?: Interesting Angles on the DOL’s Fiduciary Rule #87

Part 88 -The Fiduciary Rule: What’s Next (Part 4)? : Interesting Angles on the DOL’s Fiduciary Rule #88

Part 89 - The 5th Circuit Decision, Prohibited Transactions, and New Non-Enforcement Policies: Interesting Angles on the DOL’s Fiduciary Rule #89

Part 90 - Parallels Between the SEC Regulation Best Interest and the DOL Best Interest Contract Exemption (Part 1): Interesting Angles on the DOL’s Fiduciary Rule #90

Part 91- Parallels Between the SEC Regulation Best Interest and the DOL Best Interest Contract Exemption (Part 2): Interesting Angles on the DOL’s Fiduciary Rule #91

Part 92 - SEC Proposed Reg BI and Recommendations of Rollovers (Part 1): Interesting Angles on the DOL’s Fiduciary Rule #92

Part 93 - SEC Proposed Reg BI and Recommendations of Rollovers (Part 2): Interesting Angles on the DOL’s Fiduciary Rule #93

Part 94 - SEC Proposed Reg BI and Recommendations of Rollovers (Part 3) : Interesting Angles on the DOL’s Fiduciary Rule #94

Part 95 - Regulation Best Interest Recommendations by Broker-Dealers: Part 1- Interesting Angles on the DOL’s Fiduciary Rule #95

Part 96 - Regulation Best Interest Recommendations by Broker-Dealers: Part 2- Interesting Angles on the DOL’s Fiduciary Rule #96

Part 97 – Regulation Best Interest Recommendations by Broker-Dealers: Part 3 - Interesting Angles on the DOL’s Fiduciary Rule #97

Part 98 – Regulation Best Interest: Consideration of Cost and Compensation- Interesting Angles on the DOL’s Fiduciary Rule #98

Part 99 – Investment Advisers and the SEC's Interpretation of Their Duties: Interesting Angles on the DOL’s Fiduciary Rule #99

Part 100 - Investment Advisers and the SEC’s Interpretation of Their Duties: Part II- Interesting Angles on the DOL’s Fiduciary Rule #100

 

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About this Author

Fred Reish, Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney
Partner

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

(310) 203-4047